In August of this year, Federal Reserve Chairman Powell delivered a comprehensive dovish signal at the Jackson Hole Annual Meeting, and US Treasury prices rose further due to expectations of interest rate cuts. According to official US data, in August, the two major "creditors" of the US took divergent actions, with Japan, which temporarily alleviated currency pressure, finally increasing its holdings, while China continued to reduce its holdings.

On Thursday, October 17th, US Eastern Time, the US Treasury Department released the Treasury International Capital (TIC) report, which showed that in August, Japan's holdings of US Treasury bonds increased by 13.5 billion US dollars compared to July, reaching 1.1292 trillion US dollars, rebounding after hitting a new low since October last year for two consecutive months. With this, Japan's holdings of US Treasuries reversed the trend of declining for four consecutive months, with a cumulative reduction of 73.8 billion US dollars over the previous four months. Since surpassing China in June 2019, Japan has been the largest foreign holder of US Treasury bonds.

The TIC report shows that in August, mainland China's holdings of US Treasuries decreased by 1.9 billion US dollars compared to the previous month, with total holdings of 774.6 billion US dollars. After rebounding to a five-month high in June, holdings declined for two consecutive months, approaching the low point since March 2009. Since April 2022, China's holdings of US Treasuries have been below 1 trillion US dollars. As of August this year, it remains the second largest holder of US Treasuries after Japan. In the first eight months of this year, holdings decreased for a total of six months, with only increases in holdings in April and June.

The TIC report also shows that among the top ten countries and regions holding US Treasuries listed in the report, only mainland China and Canada saw a decrease in holdings in August. Canada, ranked sixth in total holdings, reduced its holdings by 12.3 billion US dollars. The Cayman Islands, known as a haven for hedge funds, increased holdings by 41.4 billion US dollars in August, with growth far exceeding that of other regions for two consecutive months, pushing its overall ranking from fourth in July to fifth. France, ranked ninth in total holdings, was second in terms of increase with 21.3 billion US dollars, while the United Kingdom, ranking third in total holdings, increased by 15.6 billion US dollars, slightly exceeding Japan's increase.

According to a Wall Street article, in recent months, Japan's adjustments to its US Treasury holdings have been seen as an intervention to alleviate pressure on the currency market. Data from the Bank of Japan's accounts show that the Japanese government may have injected approximately 9 trillion yen into the market to support the yen in the week ending May 3, and may have injected around 5.6 trillion yen on July 11 and 12. Media reports citing data stated that Japan injected 36.6 billion US dollars in July to intervene in the currency market. Such intervention aimed at stabilizing the yen exchange rate requires Japan to have ample "ammunition", hence the need to reduce financing, including US dollar assets such as US Treasuries.

However, by August, the Japanese yen had a strong rebound against the US dollar, rising more than 2% throughout the month. The Japanese government temporarily no longer needed support for the yen, indicating a loss of a major incentive to sell US Treasuries.

In June this year, China's holdings of US Treasury bonds unexpectedly increased by $11.9 billion, marking the largest increase in half a year. However, industry insiders believe that this is mainly due to the hawkish signal sent by the Federal Reserve's meeting in that month, slashing expectations of interest rate cuts for the year and creating an opportunity to bottom-fish US Treasury bonds. The brief increase in June did not affect the long-term trend of China's holdings of US Treasury bonds. Given the changing relationship between China and the US and the trend towards diversified allocation of foreign exchange assets, China's holdings of US Treasury bonds may still steadily decline. Most investment institutions believe that the future fluctuations in China's holdings are largely influenced by the China-US relationship.

In recent years, China's reduction in holdings of US Treasury bonds is more driven by the need for diversified allocation of foreign exchange assets. Increasing the proportion of gold allocation is a manifestation of promoting diversification. As of April this year, the People's Bank of China has set a record by consecutively increasing its gold holdings for 18 months, before pausing thereafter.

The State Administration of Foreign Exchange of China announced last month that as of the end of August, the foreign exchange reserves were 3.288215 trillion USD, an increase of 31.843 billion USD from the end of July, a month-on-month increase of 0.98%. This marks the sixth consecutive month-on-month increase in the last two months and seven months, with foreign reserves standing firmly above the 3.2 trillion USD mark for eight consecutive months. The Foreign Exchange Administration reiterated that the size of the reserves is subject to the comprehensive impact of exchange rate conversions and changes in asset prices, and pointed out a decrease in August.$USD (USDindex.FX)$The global financial asset prices continued to rise overall despite the decline in August.

At the same time, data from the State Administration of Foreign Exchange shows that China's gold reserves remained unchanged in August, indicating that the People's Bank of China has refrained from further purchases for four consecutive months.

Earlier this month, the World Gold Council (WGC) reported that in August 2024, global central bank demand for gold slowed, with a net purchase of approximately 8 tons of gold. Overall central bank gold demand has eased from its peak earlier this year but continues to show a positive growth trend.

The WGC believes that gold price performance is not the primary strategic driver for global central bank gold purchases, although the upward trend in gold prices may influence central bank buying. It is worth noting that global central bank gold sales have not increased, which may indicate a potential wait-and-see attitude rather than a change in trend. The WGC remains positive about central bank gold demand for the remaining time this year, but overall demand for the year is expected to be lower than last year.

Editor/Rocky