With US treasury prices still dominating flows across the world, do we need to worry about China’s swelling selling appetite? In recent memory China has always been one of the most significant holders of US treasury bills. Counting as quasi-FX reserves and a stabilising financial asset to hold within its coffers, China’s ownership of US debt is on a colossal scale. The size of that ownership is often characterised as systemically large and the risk of a sell-down in that stockpile of US debt when international relations between China and the US deteriorate is frequently debated.
The sell off in US treasuries and stocks is taking place at the level of the firm and investor rather than the state. Given the significant decline in US treasury yields over the past few months, those investors must be materialising some rather hefty losses. So, why sell? Without a certain path higher for US treasury yields, it seems likely that institutions are bracing for another set of intervention requests from the monetary authorities. In August when the Yuan hit a near year-low versus the US Dollar, Beijing told state owned institutions to engage in open market operations to buy Yuan to stabilise the exchange rate.
As weakness re-emerges into the Yuan, it seems likely that record sales of US assets could be in order to realise US Dollar cash to subsequently buy the Yuan when instructed. The fact China is selling US assets heavily should keep us alert to two plausible risks. Firstly, with Treasury prices perched precariously, further selling in material volumes is more likely at present to drive prices lower and yields higher. If there’s a known seller in town, benchmark yields will have an easier time moving higher. Secondly, we would be braced for any potential correction higher in the Chinese Yuan as further currency intervention looks likely once again.
Discussion and Analysis by Charles Porter
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