First time in eight months! America's two major overseas creditors have increased their holdings of US debt, leaving China's holdings at a low point since 2009

wallstreetcn ·  Jan 20 18:32

Source: Wall Street News

According to data from the US Treasury Department, China's holdings increased by 12.4 billion US dollars in November, ending a seven-month losing streak. In the first 11 months of 2023, holdings only increased in March and November, and shrank by nearly 10% in 11 months; in November, Japan increased its holdings of US debt by 29.3 billion US dollars, increasing for 2 consecutive months. In November, when expectations of the Federal Reserve's interest rate cuts heated up and the price of US bonds rebounded sharply, it was not surprising that overseas central banks increased their interest in allocating US bonds.

According to official US data, in November of last year, when market expectations for the Federal Reserve's interest rate cut in 2024 clearly heated up, China and Japan, America's two major overseas “creditors”, both increased their holdings of US debt for the first time in eight months.

On Friday, January 19, EST, the US Treasury released the November International Capital Flows Report (TIC), showing that in November 2023, Japan's US Treasury bond holdings were 1.1275 trillion US dollars, an increase of 29.3 billion US dollars over the previous month in October, increasing for two consecutive months and the fifth month in the last six months.

Since its holdings surpassed China in June 2019, Japan has been the largest overseas holder of US Treasury bonds. From January to November 2023, Japan only reduced its holdings in February, May, and September. As a result of reducing holdings by US$30.4 billion in May, the largest monthly holdings reduction in seven months. By October, there was only a net increase of 52.4 billion US dollars in holdings compared to the end of 2022.

According to the TIC report, mainland China remained the second-largest overseas country holding US treasury bonds in November. In November, it held positions of US$782 billion, an increase of US$12.4 billion over the previous month. At this point, China has ended the trend of selling US bonds for seven consecutive months, and its total holdings have temporarily left the low since May 2009, which had been set for five consecutive months.

Since April of last year, China's US debt holdings have been below 1 trillion US dollars. As of February 2023, China has reduced its holdings of US debt for seven consecutive months, and its total holdings hit a new low in more than 12 years for seven months. After increasing in March, May hit a new low since May 2010. From May to September, it reduced its holdings by more than 10 billion US dollars every month. As of November 2023, China's US debt holdings decreased by US$85 billion compared to December 2022, a decrease of 9.8%, and only increased in March and November within 11 months.

Among the top ten countries and regions with total US debt holdings, only the Cayman Islands reduced their holdings in November, a drop of 4.7 billion US dollars. It is no surprise that large “creditors” such as Japan and China increased their holdings of US debt in November. The sharp rebound in US bond prices in November undoubtedly boosted overseas central banks' interest in allocating US bond assets.

Market data shows that, fueled by expectations of interest rate cuts, all major US stock indexes ended three months of continuous decline in November. Among them, the S&P rose 8.9% and the NASDAQ rose 10.7%, all of which were the biggest monthly gains since July 2022; US Treasury bond prices surged, and yields fell sharply, and the yield on the benchmark 10-year US bond fell by about 60 basis points in November; the US dollar index fell nearly 3% in November, stopping three months of continuous increase; New York gold futures rose about 2.7% in November, rising continuously for two months.

The State Administration of Foreign Exchange announced last month that China's foreign exchange reserves rebounded in November after three months of continuous decline. The scale at the end of the month was 3.1718 trillion US dollars, up 70.586 billion US dollars from the end of October, an increase of 2.28%. The Bureau of Foreign Exchange reiterated that the decline in foreign reserves was affected by a combination of factors such as exchange rate conversion and changes in asset prices, pointing out that the US dollar index fell in November, and global financial asset prices generally rose.

Also in November, the Foreign Exchange Bureau released data showing that China's official gold reserves have been growing for 13 consecutive months. In the first 11 months of 2023, the Central Bank of China increased its gold holdings by about 6.46 million ounces, making it the world's largest buyer of gold.

According to data from the World Gold Council, demand for gold purchases by global central banks is still strong in 2023, reaching 387 tons in the first half of the year, a record high for the same period. At this pace, the annual gold purchase demand may exceed 750 tons. Although it is not as high as last year's level, it is also far higher than the average of net purchases made by central banks in the previous ten years.

Earlier, domestic media mentioned that industry insiders believe that whether falling US bond yields can attract China and other overseas central banks to increase their holdings of US debt again depends largely on each country's need for diversified allocation of their own foreign storage assets. As central banks speed up the diversification of foreign reserves, central banks in more and more countries are considering allocating gold to replace US debt. Furthermore, the increasing level of US debt and the West's tendency to freeze foreign reserves of certain countries are also the main factors for many central banks to “stay away” from US debt.


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