Recently, the U.S. Treasury Department released data on China's holdings of U.S. bonds in December last year. Surprisingly, China actually increased its holdings of U.S. bonds by 34.3 billion yuan in December last year, and if you add the 12.4 billion U.S. bonds that China increased in November, it means that China has increased its holdings of U.S. bonds by 46.7 billion yuan in the two months of November and December last year.
At the same time, there are also data showing that China has also sold a total of 97.5 billion U.S. bonds from January to October 2023. The amount of U.S. bonds that increased in November and December last year is equivalent to nearly half of the number of U.S. bonds sold from January to October last year. In fact, in addition to China, overseas holders of the United States, such as Japan and the United Kingdom, have also increased their holdings of U.S. bonds.
Many people may be surprised, haven't you seen China and other overseas holders of U.S. bonds in a row? Why did China start to increase the value of its U.S. bonds again at the end of last year? In this regard, we believe that there are two main reasons:
On the one hand, China's increase in holdings or ** U.S. bonds is mainly to sell high and buy low. We found that in March 2023, China also increased its holdings of US debt by 20.5 billion. At that time, there was a crisis in the U.S. banking sector, and a large number of safe-haven funds chose to buy U.S. bonds, and China followed suit to increase its holdings of U.S. bonds. In November and December last year, China and the United States increased their value in U.S. bonds, and the market expected that the U.S. would cut interest rates, so a large amount of funds flowed into the U.S. bond market, and China began to slightly increase the scale of its holdings of U.S. bonds.
On the other hand, China does not want to increase the value of U.S. bonds in large quantities, but the market value of U.S. bonds has appeared, which has led to an increase in the scale of China's holdings of U.S. bonds. Since the end of last year, the market expects the Fed to stop raising interest rates. As a result, a large number of investors chose to buy a large number of risk-free investment products such as U.S. bonds out of concern about the future decline in U.S. economic growth. As a result, the market value of China's holdings of U.S. bonds has also risen sharply.
Now the question is, what signal does China send behind China's slight increase in US bonds for two consecutive months in November and December last year? In this regard, we believe that there are three main ones:
First, there is room for China to further significantly increase its U.S. debt in the future. From January to October 2023, China has accumulated 97.5 billion U.S. bonds, and the number of U.S. bonds held by China has been less than 800 billion for a time, and it has suddenly increased its holdings of some U.S. bonds for two consecutive months. This is what the Chinese side wants to tell the US side that there will be a lot of room for China's US debt in the future, and the possibility of complete zeroing out of the US debt will not be ruled out in the end.
Second, judging from the fact that China increased its holdings of U.S. bonds in March, November, and December last year, China also took advantage of the fact that the market was not optimistic about the U.S. economy and followed the market to increase the value of U.S. bonds, so as to increase the market value of U.S. bonds. In the future, when the market believes that the Fed will start another interest rate hike cycle, is full of confidence in the growth of the US economy, and a large amount of capital leaves the US bond market, China will start to follow the US bond again.
Third, the Chinese side will increase its holdings of U.S. bonds for a while, and then start to increase its holdings of U.S. bonds, mainly to express to the U.S. side that China will decide to increase its holdings of U.S. bonds according to its own situation, and the initiative lies with China. The U.S. has no right to intervene in the amount of U.S. debt China holds, and whether it will increase or reduce its U.S. debt every month. Obviously, the Chinese side wants to send a signal to the US side that the amount of US bonds held by China does not need to look at the face of the US side.