Did you know?China's foreign exchange reserves hit an all-time high of 31 in October 2023012 trillion dollars, equivalent to 205 trillion yuan. This figure is staggering, because it means that China has added $70.6 billion to its foreign exchange reserves in a single month, equivalent to 500 billion yuan. And that's just a month's mark.
Looking at the United States again, in the past three months, the United States has been desperately suppressing the exchange rates of other currencies, and our foreign exchange reserves have fallen for three consecutive months. The United States also got its wish for three months. However, such a comparison does not tell the essence of the problem, because changes in foreign exchange reserves depend not only on the exchange rate, but also on other factors, such as ** and US Treasuries.
So, how did China manage the surge in foreign reserves?What changes have been made to the structure of China's foreign exchange reserves?
Why is China desperately buying?
* It is a rare and valuable metal, which has the functions of value preservation, hedging and diversification, and is an important part of international reserve assets. It is affected by a variety of factors such as global economic, political, and monetary policies, and is usually affected by economic crises, rising inflation, currency depreciation, etc., reflecting the market's confidence and demand.
According to the World ** Association, in the first half of 2023, global central bank gold purchase demand reached 387 tons, a record high for the same period, of which the Chinese central bank gold purchase reached 230 tons, accounting for 59% of global central bank gold purchases.
As of the end of October 2023, the size of China's central bank** reserves has reached 70.46 million ounces, an increase of 840,000 ounces from 69.62 million ounces at the end of August, and the first time in history that it has exceeded the 70 million ounce mark. So, why is China desperately buying **?
China may be aiming to diversify and secure its foreign exchange reserves and reduce its dependence on and risk on US dollar assets.
The U.S. dollar is the main component of the international reserve currency, and it is also the main settlement currency of international ** and investment, but the U.S. dollar also has risks of depreciation, inflation, political instability, etc., especially in the context of the rising U.S. fiscal deficit and debt levels, the Federal Reserve's continuous easing of monetary policy, and the intensification of diplomatic frictions between the United States and other countries, the status and credibility of the U.S. dollar may be challenged and impacted.
Therefore, China may hope to improve the stability of foreign exchange reserves and its ability to resist risks by increasing its reserves, and at the same time, it can also increase its voice and influence in the international financial system.
Second, China may be seizing the opportunity of the low level to reserve more resources for future economic development and financial stability. **Affected by various factors such as supply and demand, market sentiment, investment demand, etc., it has a certain volatility and cyclicality. According to CEIC data, the *** in October 2023 was 1760$6 an ounce, up from $2,075 in August 20221 dollar ounce** up 152%, a new low in the past two years.
This may be due to factors such as the expectation of a global economic recovery, the expectation of monetary policy tightening in major economies, and the easing of the new crown epidemic. However, these factors are not necessarily sustainable or stable, and there are uncertainties and risks, such as the mutation and ** of the new crown epidemic, the rise and loss of control of global inflation, geopolitical tensions and conflicts, etc.
Therefore, China may think that the current situation is already lower than its intrinsic value, and there is a large space and potential, so it chooses to reserve more resources for future economic development and financial stability.
Why is China dumping US debt on a large scale?
U.S. bonds are bonds issued by the United States**, which are one of the largest, most liquid and safest bond markets in the world, and one of the main reserve assets of central banks and investors around the world.
The yield of U.S. bonds is affected by a variety of factors such as global economic, political, and monetary policies, and usually occurs in the context of economic growth, rising inflation, and tightening monetary policy, reflecting the market's supply, demand and expectations for U.S. bonds. According to the U.S. Treasury Department, China's holdings of U.S. debt have continued to decline, falling to $778.1 billion by the end of September 2023, down $57.3 billion from $835.4 billion at the end of June 2023 and hitting a new low in nearly a decade.
So, why is China dumping US debt aggressively?China may be adjusting the structure and allocation of foreign exchange reserves to improve the profitability and efficiency of foreign exchange reserves. U.S. bonds are a major component of foreign exchange reserves, but the yield on U.S. bonds is already at historically low levels, and even negative interest rates have occurred, which means that the cost and risk of holding U.S. bonds have increased, and the returns and efficiency have decreased.
According to CEIC, the 10-year yield on U.S. Treasury bonds in October 2023 was 156%, up from 0.0 in August 202251% rose by 105 basis points, a new high in the past two years.
This may be due to factors such as the rising fiscal deficit and debt levels in the United States, the continuous easing of monetary policy by the Federal Reserve, and the rising and runaway inflation in the United States. As a result, China may want to increase the profitability and efficiency of its foreign exchange reserves by reducing its holdings of U.S. debt and investing in other assets with more yielding and potential potential, such as **, euro, yen, renminbi, etc.
Second, China may be responding to U.S. and diplomatic pressure to reduce its economic and financial dependence on the U.S. The United States is China's largest partner and China's largest creditor, but the United States is also China's biggest competitor and China's biggest source of threat.
In the past few years, the United States has continuously waged a first-class war, a scientific and technological war, a financial war, and an ideological war against China in an attempt to contain and suppress China's development and rise, causing huge losses and difficulties to China.
Therefore, China may hope to reduce its economic and financial dependence on the United States by reducing its holdings of U.S. bonds, increase its bargaining power and countermeasures against the United States, and at the same time avoid the United States from using U.S. bonds as a tool to impose sanctions and pressure on China.
The sharp rise in foreign reserves is a bright spot in China's economy and finance, and it is also a major positive for the world economy and finance. China has succeeded in achieving a sharp rise in foreign reserves by desperately buying ** and selling US bonds on a large scale, which has not only improved its own economic and financial strength, but also enhanced the economic and financial stability of the world.
This fully demonstrates China's wisdom and ability, as well as China's confidence and responsibility. We have reason to believe that China's foreign exchange reserves will continue to maintain steady and healthy development and make greater contributions to the economic and financial prosperity and progress of China and the world.