China's exposure to US bonds falls further

As China continues to scale down its exposure to US Treasury bonds, experts have said such steps are necessary given the deteriorating overseas debt situation of the United States and China's need to optimize its own overseas assets structure.

According to the Treasury International Capital data released by the US Treasury Department on Tuesday, as of October, China held a net $769.6 billion worth of US government bonds, down $8.5 billion from a month earlier and the lowest since 2009. It is also the seventh consecutive month that China's investment in US Treasury bonds has shrunk.

China is the second-largest foreign investor in US government bonds after Japan, according to Treasury International Capital. However, China's holding in US government securities has contracted by nearly $100 billion so far this year.

While China has not been dumping the bonds, no fresh purchases are being made to replace bonds that have matured, Yu Yongding, an academician at the Chinese Academy of Social Sciences, said at a forum on Sunday.

Yu, also a former adviser to the People's Bank of China, the country's central bank, stressed that it is "necessary" for China to reduce its US Treasury holdings in an orderly manner given the deteriorating US overseas debt situation, the falling coupon rate of the Treasury bonds, and the likelihood of economic downturns in the US.

In 2006, when the ratio of net debt to GDP in the US crossed 10 percent, the capital markets had become nervous. Now, that ratio stands between 60 and 70 percent. This indicates that the US' net overseas debt situation will continue to worsen, and it may get aggravated by the continued interest rate spikes by the US Federal Reserve. Therefore, China's orderly trimming of US Treasury securities is quite necessary, he said.

In August, Fitch Ratings lowered its US credit rating from AAA to AA+. Likewise, Moody's Investors Service lowered its outlook on US government debt in October to "negative" from "stable" due to large fiscal deficits and a decline in debt affordability.

In this case, Yu said China should step up its efforts to adjust the structure of its overseas assets and liabilities, increase its income from overseas net assets, and try its best to reduce its foreign exchange reserve to an adequate level that is internationally recognized.

To maintain the safety of China's foreign reserves and overseas assets, Yu said that the country should try to maintain a balance in foreign trade and make the domestic market the mainstay over a period of time.

Wang Qing, chief macroeconomy analyst at Golden Credit Rating, said that China's shrinking exposure to US bonds has been a long-term trend since the holdings peaked at the end of 2013.

In 10 years, the holdings have declined nearly 34 percent. During the same period, China's gold reserves have continued to rise, reaching 70.46 million ounces at the end of September, more than double the size of its gold reserves at the end of 2013.

This is also part of China's long-term strategy of optimizing its structure of foreign exchange reserve assets, he said.

According to data released by the US Treasury Department, overall foreign investor holding of US Treasury bonds fell for the second consecutive month to $7.565 trillion in October, from $7.604 trillion in September.

Luo Zhiheng, chief economist at Yuekai Securities, said demand for US government securities has been insufficient mainly because of the Fed's shrinking balance sheet and the sale of US Treasury bonds by emerging economies since July to stabilize their exchange rates against the rising US dollar.

Meanwhile, after the failure of Silicon Valley Bank in March, the ability of US commercial banks to absorb US Treasury bonds has declined. These US domestic institutions have become especially cautious about buying long-term bonds, he said.