Analysts say the Chinese Communist Party is unlikely to use its U.S. bond holdings as a weapon even if U.S.-China trade tensions continue.
A Reuters report on April 1 said China could slow its purchases of U.S. bonds or sell more than a trillion dollars of U.S. government bonds, worrying investors, but analysts said it is a complex task for China to both reduce its U.S. bond holdings and avoid damaging its own value.
Matt Gertken, a geopolitical analyst at BCA Research, told Reuters, “Despite the rising tensions we’re seeing, we’re still not seeing China divesting quickly. It’s not a weapon that they can use without hurting themselves.”
Gertken said that if issues such as Hong Kong and Taiwan explode, the Chinese Communist Party “could use U.S. Treasury bonds to send a signal” that other countries may buy U.S. Treasuries because of concerns about global stability.
Reuters reported that Morgan Stanley analyst Min Dai said in a recent report that China’s foreign exchange reserves have increased in the past few months as the yuan has appreciated, which has increased China’s purchases of U.S. government bonds.
The latest government data show that China’s holdings of U.S. government bonds increased to $1,095 billion in January this year from $1,054 billion in October last year, but still below the highest level of $1,320 billion in 2013. Japan’s holdings of U.S. Treasuries reached $1,280 billion in January, making it the largest overseas holder of U.S. government bonds.
If China were to reduce its purchases of U.S. government bonds, it would run into the additional problem that few other markets have as low a risk as U.S. Treasuries. If China were to sell U.S. bonds, then any increase in their yield would increase their relative attractiveness and other investors could acquire them.
As yields strengthen, it starts to become attractive to other overseas investors, especially hedge-based investors,” Brian Kloss, a fixed-income investment manager at Brandywine Global Investment Management, told Reuters. So if China pulls out, they may come in and fill some of the vacuum that’s left.”
The Fed is also expected to make acquisitions if yields on government bonds rise to levels that could affect the U.S. economy.
Either way, “it’s not a weapon that the Chinese Communist Party can easily use,” Reuters quoted Getken as saying, “China only holds about 5 percent of U.S. Treasuries, so they can bring some change, but that’s basically it.”
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