China's U.S. Treasury Holdings Fall Below $1 Trillion for the First Time in 12 Years

Continuous Decline Since November Last Year
Concerns Over Investment Losses and Capital Outflows Due to US Interest Rate Hikes

[Image source=AP Yonhap News]

[Asia Economy Reporter Hyunwoo Lee] China's holdings of U.S. Treasury securities have fallen below $1 trillion (approximately 1,315 trillion KRW) for the first time in 12 years since 2010. This is interpreted as a measure to respond to large-scale capital outflows from emerging markets such as China amid concerns over investment losses due to the U.S. Federal Reserve's interest rate hikes. Some analysts also suggest that the Chinese government is deliberately diversifying its foreign currency reserves by selling U.S. bonds to reduce dependence on the U.S. dollar and strengthen resistance to dollar hegemony.

On the 18th (local time), the U.S. Department of the Treasury announced that as of May this year, China's holdings of U.S. Treasury securities amounted to $980.8 billion, falling below $1 trillion for the first time since May 2010. This represents a decrease of $22.6 billion compared to the previous month and a reduction of $79.3 billion compared to the beginning of the year when holdings were $1.0601 trillion. China's holdings of U.S. Treasuries have been declining for seven consecutive months since November last year.

The reason the Chinese government has been continuously reducing its U.S. Treasury holdings this year is attributed to the U.S. interest rate hike trend. As the U.S. government continues an aggressive interest rate hike policy to curb rapid inflation, concerns over bond investment losses have increased. The yield on the 10-year U.S. Treasury note, a benchmark for U.S. Treasury rates, surged nearly twofold from 1.512% at the beginning of the year to 2.989% as of the previous day. In the bond market, when bond yields rise, bond prices fall, prompting investors holding bonds to sell when rates spike.

Additionally, the intensifying capital outflows from China and other emerging markets due to rising U.S. interest rates are also analyzed to have influenced China's selling of U.S. Treasuries. According to the Institute of International Finance (IIF), foreign investors net sold more than $2.5 billion in China's bond market in June. The IIF analyzed this as the largest scale of capital outflow in seven years.

In particular, considering China's experience of massive capital outflows during the U.S. interest rate hike period from 2015 to 2016, it is estimated that China is continuously selling U.S. Treasury assets to prepare for foreign currency outflows. Jonathan Fortun, an economist at the IIF, stated in an interview with the Hong Kong South China Morning Post (SCMP), "From 2015 to 2016, fears of U.S. interest rate hikes and yuan depreciation overlapped in China's securities and bond markets, resulting in capital outflows exceeding $670 billion," adding, "With geopolitical issues such as the Ukraine crisis, U.S. monetary tightening, and inflation concerns compounding, worries about capital outflows from China and emerging markets have greatly increased."

Some also analyze that the Chinese government is intentionally reducing its share of U.S. Treasury holdings to lower dependence on U.S. capital and resist dollar hegemony.

Tian Yun, former vice chairman of the Beijing Economic Operation Association, explained in an interview with the Chinese state-run Global Times, "The reduction in China's holdings of U.S. Treasuries can also be interpreted as growing Chinese resistance to U.S. dollar hegemony," adding, "In the long term, China should promote diversification of its foreign exchange structure, increase gold reserves, and devise plans to link major resource exports such as rare earths with the yuan."

This content was produced with the assistance of AI translation services.