On Tuesday, Treasury International Capital (TIC) data was released by the U.S. Department of the Treasury, which revealed that China’s holding of U.S. Treasury bonds in December has declined to its lowest level since February of last year. It is believed that China has been selling off U.S. Treasury securities in order boost their foreign exchange reserves to support the yuan. China's foreign exchange reserves have declined rapidly in the last three months and are at their lowest levels in the last three years.

China – The Largest Holder of U.S. Treasuries

According to TIC data, which shows sales and purchases of U.S. treasury securities, indicate that China was the largest holder of U.S. government debt in December with $1.25 billion in bonds, notes and bills. Still, its holdings declined by $18.4 billion from November.

 The second largest holder of U.S. treasury securities was Japan, with a holding of $1.123 trillion in December. This figure also declined by $22.4 billion from November.

Belgian Holdings Declined

It is also important to note that Belgian holdings of treasury securities also declined by about $21.9 billion and it is believed that again the reason here was China. Thomas Simons, economist at Jefferies, said, “Belgian holdings have been a point of focus due to extreme volatility.... This is significant because it is widely speculated that China executes trades with Treasuries held in custody in Belgium.” This means that the total Chinese holdings dropped by around $40 billion in December.

Till now, Belgium was the third largest holder of U.S. Treasuries but its holdings have slumped sharply by $202 billion since February 2015.

Details of the Report

According to the TIC report, the net foreign outflows of U.S. Treasury securities stood at $114 billion in December, out of which private investors dumped $88.5 billion worth of securities. The remaining were sold by officials such as Central Banks and sovereign wealth funds.

Will China’s Foreign Currency Reserves Continue to Decline?

Earlier this month, Albert Edwards, a global strategist at Societe Generale, said that China’s foreign currency reserves will decline rapidly and will last only for the next few months. However, after taking into account China’s holdings in U.S. Treasury securities and rate at which China has sold off the securities in December, Janney Montgomery Scott believes that China’s foreign currency reserves will last for another six years.

Guy LeBas, chief fixed income strategist at Janney Montgomery Scott, said, “While China does need to raise dollars, sell those dollars, and buy yuan to support its currency, the pace of any needed asset sales is far from breakneck and instead looks remarkably measured.” He added, “[China] only accounted for about a third of Asia’s net outflows at $18 billion; Japan’s $22 billion [outflow] was actually greater.”

The Bottom Line

After Chinese Central Bank devalued the yuan in last August, their currency has been witnessing increasing downward pressure, which has led to a massive sell-off in Chinese equities by investors. To control capital outflows, authorities have to continuously intervene and are currently selling U.S. Treasury securities in order to prevent the yuan from falling further.

 

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