China's recent sudden announcement of a massive sell-off of U.S. Treasury bonds has attracted widespread attention and discussion. According to reports, China's current holdings of U.S. bonds are only $778.1 billion, a significant decrease from the previous large holdings. This move made Fed Chairman Jerome Powell very nervous, as China is one of the largest creditors of the United States. China's holding of a large number of U.S. bonds will have a profound impact on global financial markets.
There are multiple reasons for China's sell-off of U.S. bonds. First, as the world's second-largest economy, China needs to use a large amount of foreign exchange funds to support domestic development and stabilize economic growth. The sell-off of U.S. bonds could free up capital for China to invest in other areas. Second, the escalation of the war between China and the United States has led to tensions between the two countries, and China's sell-off of US bonds can be seen as a political response. Finally, China's over-reliance on US dollar assets has also prompted it to diversify its portfolio and reduce its holdings of US bonds.
China's massive sell-off has sparked fears and panic in the market. U.S. Treasuries have long been regarded as safe-haven assets in global financial markets, and their ** and interest rates have a significant impact on global markets. China's move could trigger a sharp increase in U.S. debt, leading to turmoil and instability in global bond markets. In addition, the interest cost of US Treasuries will also rise, putting some pressure on US economic growth.
However, China is not the largest creditor of the United States. As of now, Japan remains the largest creditor of the United States, holding about 1$19 trillion in U.S. debt, while China holds about $778.1 billion. Despite China's large holdings of U.S. bonds, its holdings of U.S. bonds account for only 2.0% of the total value of U.S. bonds3. It is not the largest creditor country. In fact, the largest holder of U.S. bonds is the Federal Reserve, which holds nearly 5 trillion U.S. dollars, far more than China and Japan combined, accounting for 14 percent of the U.S. debt88％。
China's sell-off has had a certain impact on the U.S. bond market. With China, U.S. Treasuries will be at risk, and interest rates may also rise. This is not a small pressure for the United States**, as debt repayment pressure will increase. In addition, China's move also sends a signal to other countries and investors that the global dependence on U.S. debt is waning, which could trigger instability in global financial markets.
At present, the size of the US Treasury debt has climbed to 33$9 trillion, equivalent to about 10% of the world's total debt. Although the U.S. does not have the highest debt-to-GDP ratio compared to other countries, its large debt is still among the highest in the world. According to statistics from the Institute of International Finance, as of the first half of 2023, global debt totaled $307 trillion, of which the United States accounted for more than 10%.
The rapid growth of U.S. debt is mainly due to the increasing long-term fiscal spending and the easing of fiscal policy. In recent years, the United States** has continued to borrow to meet domestic spending needs, which has led to a rapid expansion of the size of the debt. The increase in the debt ceiling has further boosted the increase in debt, making the debt problem of the United States increasingly prominent.
As the size of the U.S. debt grows, so does the corresponding interest cost. According to the latest data, the annual interest paid by the United States on US debt has exceeded one trillion dollars and is still increasing. This is a huge burden for the United States, especially if economic growth slows. In addition, the interest rate hike that began last year has also caused the United States to pay more interest than it previously was.
It is important to note that the main buyers of U.S. Treasury bonds are not foreign investors, but domestic investors. According to the latest data, domestic investors account for 76% of the share of US debt, while the share held by foreign investors has fallen to 24% from 34% previously. This shows that the attractiveness of U.S. bonds in the international market is gradually decreasing.
In addition to Chinese and Japan** US bonds, the Fed has surprisingly joined the sell-off. Although the Fed holds a relatively small amount of U.S. Treasuries, about $5 trillion, its sell-off has had a significant impact on the U.S. bond market due to its special status.
The reason for the Fed's announcement of the sell-off of US Treasuries is to shrink its balance sheet and control inflation. However, in fact, it is also to reduce its own losses. The Fed has reportedly lost about $120 billion. If the sale of U.S. bonds just to control inflation results in a large number of U.S. bonds and difficulties in the issuance of U.S. bonds, it will undoubtedly outweigh the losses.
The impact of the Fed's sell-off on the U.S. Treasury market has been enormous. As one of the world's largest holders of U.S. bonds, the Federal Reserve's move will cause panic and worry in the market, further exacerbating the risk of U.S. bonds. In addition, the Fed's sell-off will also have a knock-on effect on global financial markets, further exacerbating market instability.
In summary, China's large-scale sell-off of U.S. bonds, the sheer size of U.S. debt, and the Fed's sell-off have had a profound impact on global financial markets. This series of moves not only caused panic and worry in the market, but also put some pressure on the stability of the global bond market and economic growth. Against this backdrop, countries need to strengthen cooperation to jointly address financial risks and maintain the stability and prosperity of the global financial market.