China cut its holdings of US Treasuries in September, according to the latest data, but experts said on Sunday that the move is aimed at supporting the yuan rather than getting back at the US amid the ongoing trade war.
According to data released by the US Treasury on Friday, China held $1.15 trillion of US Treasuries by the end of September, down by about $13.7 billion from the previous month.
China is still the largest holder of US Treasuries.
Some overseas media reports have suggested that China might sell off US Treasuries as a tactic in the trade battle with the US. For example, a commentary published in April by the financial information website Market Watch noted that China might move to unload its stockpile of bonds in an effort to “punish” the US by driving up the US’ borrowing costs.
A BBC report in July also noted that selling US bonds would be one effective way for China to get back at the US.
Supporting the yuan
Experts said that the sale of US bonds shows the Chinese government’s determination to support the yuan. The currency is currently facing depreciation pressure, partly because of the protectionist measures taken by the administration of US President Donald Trump.
“In recent months, the depreciation pressure on the yuan has been fairly strong, which has forced the government to intervene and support the currency. In order to do that, the government has to sell some US bonds in exchange for US dollars, and then sell those dollars to buy yuan,” Zhou Yu, director of the Research Center of International Finance at the Shanghai Academy of Social Sciences, told the Global Times on Sunday.
Zhou noted that the yuan’s exchange rate against the US dollar is approaching 7, which is seen as a bottom line.
“The government wants the yuan to stabilise more than anything else, as continuous depreciation might trigger capital outflows, which would create risks for the domestic economy,” Zhou said.
The yuan’s central parity rate against the US dollar stood at 6.9377 on Friday, compared with 6.5079 on January 2, the first trading day this year.
But Zhou cautioned that if the US dollar continues to rise and the trade dispute worsens, the yuan could weaken past the level of 7 to the dollar, which would prompt the Chinese government to take more measures to support the currency.
But experts have clarified that China has not sold US bonds as a means of retaliation against the US.
Yu Fenghui, a professor at the Huazhong University of Science and Technology, said that one reason for the sale of US bonds might have been concerns that their price will soon slip as there are rising worries that the US economy is headed for a decline.
“Also, I don’t think dumping US bonds, which will lead to a plunge in US Treasury prices, will do China any good, because China is the largest holder of US Treasury bonds,” Yu told the Global Times.
Japan also cut its holdings of US Treasuries by $1.9 billion to $1.028 trillion in September, the lowest level since October 2011, according to the US Treasury data.
Zhou said that if China wanted to get back at the US by selling off bonds, it would have sold them in larger quantities and faster. But China’s selling of US bonds has been at a very moderate pace and to a limited extent.
“I don’t think that’s malicious selling,” Zhou said. “Besides, supporting the yuan could ease the trade dispute as the US does not want to see a weak yuan either,” Zhou said.