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Seeking to minimize risk: China withdraws money from U.S. government debt for the seventh month in a row

Photo by Diego Jimenez on Unsplash

The volume of China’s investment in U.S. government bonds (treasuries) fell to a record low level for more than 12.5 years. This is evidenced by the latest data from the U.S. Treasury Department.

As follows from the materials of the Office, in February 2023, China reduced investments in U.S. Treasury securities by $10.6 billion – up to $ 848.8 billion. The last time a similar value could be observed in June 2010.

Let us explain that Treasuries of the U.S. Treasury are the debt obligations, guaranteed by the U.S. government. Various governments, companies and private investors buy these securities at a certain value and subsequently receive a steady income from them in the form of interest. In other words, holders of government bonds lend their money to the U.S. economy.

Today about a quarter of the total United States debt (about $31.46 trillion) accounts for Treasury securities – almost 23.3%. Along with China, Japan (the country keeps about $1.08 trillion in debt securities), Great Britain ($643 billion), Belgium ($330.9 billion), Luxemburg ($327 billion) and Switzerland ($290 billion) are the main creditors of the United States.

Even before 2018, China held more than $1.1 trillion in U.S. government bonds and was the largest holder of U.S. government debt, but already in 2019 gave way to Japan. At that time, Beijing began to reduce its investments in treasury securities against the background of the trade war with Washington.

After that, during two years, the Asian republic still kept from $1 trillion to $1.1 trillion of its reserves in treasuries, but in 2022 the situation began to change again. According to statistics from the U.S. Treasury Department, the volume of U.S. government bonds in Beijing’s hands has been steadily declining for seven months in a row, and during that time it has decreased by almost $90.4 billion.

“One of the reasons for the observed dynamics was an economic factor. Against the background of the ongoing increasing interest rates in the US, all previous investments in treasuries begin to depreciate. Against this background, the total value of U.S. government bonds in China’s portfolio decreases,” Alexander Razuvaev, a member of the supervisory board of the Guild of Financial Analysts and Risk Managers, explained to .

Recall that in 2022, after the imposition of energy sanctions against Russia in the United States fuel prices went up sharply and inflation accelerated to the maximum in the last 40 years. To combat rising prices, the U.S. Federal Reserve System (which serves as the country’s central bank) began to sharply tighten monetary policy.

Over the past year, the U.S. regulator raised interest rates nine times and raised them to 4.75-5%. The achieved value has become the highest since 2007.

Traditionally such tightening of monetary policy is considered one of the main instruments in the fight against inflation. As a result of rising rates, the cost of loans for citizens and businesses grows, economic activity weakens, which puts pressure on prices. At the same time, at the expense of the Fed’s actions, the yields of treasuries are increasing, but their value is decreasing.

“However, the reduction of Chinese investment in U.S. government securities may also be due to political reasons. There is a risk that because of the current course of the PRC government Washington can seize or freeze some of the money of the Asian republic. Beijing probably takes into account the possibility of such developments and seeks to minimize the risks,” Alexander Razuvaev added.

The unprecedented U.S. and European sanctions against Russia could be an alarm bell for the Chinese leadership. Alexei Fedorov, an analyst at TeleTrade, shared this opinion with .

Since the start of a special military operation in Ukraine in February 2022, the West has already imposed more than 12,600 different restrictions against Moscow. In addition to the energy sector, the restrictions have affected trade, aviation, the banking sector, as well as the gold and currency reserves of Russia.

It is noteworthy that the Russian authorities foresaw this scenario and partially prepared for it. For example, over the past few years Moscow has almost completely withdrawn its money from the U.S. government debt. At the end of 2017, Russia held more than $102 billion in treasuries, and by the time sanctions were imposed in 2022, this figure was already about $2 billion, and now it is only $75 million.

Although Western countries, primarily European countries, still managed to block about half of Russia’s gold reserves of almost $300 billion, the EU is still unable to determine where the money is, according to the German newspaper Süddeutsche Zeitung. Nevertheless, this situation has become a reason for China to start transferring its funds into more reliable assets, such as gold, says Alexei Fedorov.

“China, defending its economic interests, is facing more and more political pressure from Washington. If escalation continues, and this is what the U.S. foreign policy vector implies, nothing will prevent the West from blocking China’s funds, as it has already been done with Russia’s gold reserves. Beijing’s investment in treasuries is therefore likely to continue to decline, at least to the minimum values that allow it to maintain trade relations with the United States. For China it is about $300-500 billion,” Fedorov suggested..

Note that the level of trade turnover between China and the U.S. directly affects investment in U.S. government debt. Traditionally, the money received from exports China spends either to import goods from the United States, or to buy U.S. government securities for additional profits.

“However, the further dynamics of investment in U.S. government debt will depend on U.S. foreign policy and the success of an alternative center of power from China, Russia, Iran and other countries. If Washington continues to ignore the fait accompli of the West’s loss of dominance in the global economy, the withdrawal of money from the treasuries will accelerate and expand geographically, which could undermine the status of the dollar on the world stage,” Fedorov added.

Interestingly, the U.S. Treasury Department has already started talking about the increased risks for the U.S. currency. As the head of the agency Janet Yellen said on April 16, Washington continues to apply restrictive measures against a number of countries around the world, in response more and more countries are beginning to look for a replacement for the dollar in trade and financial transactions. As a result, the national currency of the United States risks losing its dominant position in the global market, the minister did not rule out.

“When we use financial sanctions that are related to the role of the dollar, there is a risk that over time it could undermine the hegemony of the dollar…And of course, from China, Russia, Iran, as a result, there is a desire to find an alternative,” Yellen said in an interview with CNN.

In addition, according to her, another serious threat to the dollar could be a possible default in the U.S. To date, the U.S. national debt has already slightly exceeded the ceiling of $31.4 trillion set by the country’s authorities. Now the U.S. government must agree to raise the limit, or in the near future Washington will have nothing to pay its creditors.

We explain that the debt ceiling is an artificial restriction that was originally created to protect the country from excessive increase in borrowing. However, against the backdrop of ever-increasing budget expenditures, Washington periodically has to either raise the limit or refuse to use it at all. And the discussion of this issue is usually accompanied by serious disputes and becomes the subject of political bargaining between the parties.

The current situation around the U.S. government debt risks that the international rating of the U.S. debt securities may be downgraded from today’s “safe” to “junk,” Russian businessman Oleg Deripaska did not rule out that. Moreover, in his opinion, such a development would only be “the tip of the iceberg of the accumulated problems” of the United States.

“The U.S. has absolutely played around with using the dollar’s status as the world’s reserve currency. In the end, however unbelievable it may seem, but now they themselves are one step away from bankruptcy of state finances, and the situation will only be exacerbated by internal political games that will go on until the end of next year,” Deripaska wrote in his Telegram channel.

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