China’s share of US government debt has fallen below $1 trillion – the lowest level in 12 years. China has been a big buyer of US debt. So what’s behind the change?
The Chinese economy has slowed considerably in recent months.
“Entire sectors of the economy have effectively come to a standstill,” said Gennadiy Goldberg of TD Securities.
Now, Goldberg said, China is dumping its US Treasuries to defend its own currency, the yuan, which has lost value as the dollar has strengthened.
“What China wants to do is actually manage some of the pace of that depreciation. One of the ways they’re doing that is selling the dollars and buying the yuan.
The withdrawal of one of the biggest buyers of US Treasuries could bolster the Federal Reserve’s efforts to raise interest rates to cool the economy, Goldberg added. But it could also lead to tighter financial conditions than Fed policymakers want.
But getting away from the dollar is not easy.
“The fundamental question is what do you do with a trillion dollars? There just aren’t many markets in which you can safely invest a trillion dollars,” said David Dollar of the China Center at Brookings. Institution.
According to Dollar, a big reason for China’s change comes down to politics. “They are unhappy with how the United States continues to use financial sanctions around the world.”
Like the exclusion of many Russian banks from the SWIFT international payment system soon after Russia invaded Ukraine, according to Thomas Hogan of the American Institute for Economic Research.
“This was a major wake-up call for China and other countries that may not be politically aligned with the United States in Europe,” he said. “They realize that the SWIFT system could be used as a political weapon to harm them economically.”
Hogan expects US debt shed to be slow and steady. After all, China will not want to hurt the considerable investment it still has.
There’s a lot going on in the world. Through it all, Marketplace is there for you.
You rely on Marketplace to break down world events and tell you how it affects you in a factual and accessible way. We count on your financial support to continue to make this possible.
Your donation today fuels the independent journalism you rely on. For just $5/month, you can help maintain Marketplace so we can keep reporting on the things that matter to you.