China bought more US debt in May despite talk of financial war amid rising trans-Pacific tensions

·5-min read

China modestly increased its holdings of US Treasury securities in May, the first in three months, despite rising trans-Pacific tensions and growing talk of a financial war between the world’s two largest economies.

China added US$10.9 billion of US Treasury securities in May from a month earlier, after cutting its holdings in each of the previous two months, according to a report released by the US Treasury Department last week.

The modest growth came at a time when fears are growing that confrontations between Beijing and Washington over the coronavirus pandemic, the Hong Kong national security law and Xinjiang could spill over into the financial sector.

Get the latest insights and analysis from our Global Impact newsletter on the big stories originating in China.

Debate in Beijing continues over whether the United States could restrict or even cut off its access to the US dollar, while China could retaliate by dumping its holdings of US government debt, although analysts said this “nuclear option” is highly unlikely because of the damage it would do to both countries as well as the global economy.

We don't have the data of [China’s] holdings of US stocks, so it’s really hard to look at this data from a particular angle

Zhou Hao

“We don't have the data of [China’s] holdings of US stocks, so it’s really hard to look at this data from a particular angle,” said Zhou Hao, a senior emerging market economist for Commerzbank.

The latest Chinese purchase of US government debt, however, showed that Beijing has yet to use its US$1 trillion holdings as a weapon, and is not being deterred by threats from some politicians in Washington that the US should disown some or all of the debt it owes China as a compensation for its perceived initial mishandling of the coronavirus outbreak.

The Hong Kong Autonomy Act, signed by the US President Donald Trump last week, paved the way for some freezing of US dollar assets – including US Treasury securities – held by Chinese banks as a sanction for their involvement with individuals and institutions associated with the controversial Hong Kong national security law.

China does not publish figures on its holdings of US Treasuries, meaning the US Treasury Department figure may account for only a part of the real amount as Beijing is also widely believed to use proxies to buy US government bonds.

The increase of China’s holdings in May could be a result, in part, from a rise in the country’s foreign exchange reserves after it grew by US$10.23 billion to US$3.102 trillion last month, according to data of China’s State Administration of Foreign Exchange (SAFE). Some of the increase, though, was due to the revaluation of existing holdings and SAFE did not immediately respond to faxed questions from the South China Morning Post.

China’s foreign exchange reserves also rose US$10.64 billion in June to US$3.112 trillion.

Huang Qifan, the outspoken former mayor of Chongqing, said earlier this year that the US was unlikely to take the risk of losing its own credibility by freezing China’s US debt holdings, and that China would not easily take the steps towards selling its US Treasuries.

“If the day of freezing comes, it would be the day of doom for the dollar empire,” he wrote in an article published at the start of May.

Overall, China’s holdings of US Treasury securities stood at US$1.08 trillion at the end of May, below the US$1.1 trillion level at the end of May 2019.

China remains the second largest foreign holder of US government debt after Japan with US$1.260 trillion at the end of May despite having reduced its holdings in nine of the previous 13 months before May.

Foreign investors sold a total of US$27.7 billion in US Treasury bonds and notes in May, the third straight month of net sales, but bought a record US$79.7 billion of US equities amid a strong rally in risk assets, according data from the US Treasury.

Purchase the 120+ page China Internet Report 2020 Pro Edition, brought to you by SCMP Research, and enjoy a 30% discount (original price US$400). The report includes deep-dive analysis, trends, and case studies on the 10 most important internet sectors. Now in its 3rd year, this go-to source for understanding China tech also comes with exclusive access to 6+ webinars with C-level executives, including Charles Li, CEO of HKEX, James Peng, CEO/founder of Pony.ai, and senior executives from Alibaba, Huawei, Kuaishou, Pinduoduo, and more. Offer valid until 31 August 2020. To purchase, please click here.

More from South China Morning Post:

This article China bought more US debt in May despite talk of financial war amid rising trans-Pacific tensions first appeared on South China Morning Post

For the latest news from the South China Morning Post download our mobile app. Copyright 2020.

Our goal is to create a safe and engaging place for users to connect over interests and passions. In order to improve our community experience, we are temporarily suspending article commenting