Published: Sun, January 14, 2018
Finance | By Loren Pratt

Reports that China may halt United States government bond purchases may be incorrect

Reports that China may halt United States government bond purchases may be incorrect

The drop in the dollar came after Bloomberg reported that Chinese officials reviewing foreign-exchange holdings have recommended slowing or halting purchases of U.S. Treasuries.

Not only would such a step hurt China by decreasing the value of its bond holdings, it would wreak havoc in a global economy that the country is now fully integrated into through deep trade and financial links. The decision is based on the fact that other investments may offer better returns, but also on the mounting trade tensions between Beijing and Washington.

"China's rising foreign exchange reserves, and our view of United States dollars depreciation, suggests China's purchases of USA treasuries will either pick up, or more likely, remain stable", say Grace and Haddad.

Bloomberg News estimates that the Chinese state now holds around $1.2 trillion in USA debt, an amount that has doubled over the last 10 years.

China, the biggest buyer of USA sovereign bonds, could be slowing down or even halting its purchases, according to a report.

Of course, regardless of the eventual reason behind such a move, the idea that China's holdings of U.S. bonds won't still shrink coud turn out to be wrong. The sentiment was already fragile earlier on Wednesday ahead of an issue of 10-year notes by the Treasury and a glut of supply from Europe.


"China is the largest single foreign holder of USA debt, but their incremental changes tend to be small relative to other flows in the market and in recent years some periods where holdings have fallen correspond with risk-off moves that see yields move lower, sometimes helped by fears over China growth", he said. In 2017, the central bank also hiked rates three times.

Trading after the China news shows investors didn't exactly storm the exits.

"I think the Chinese will contribute to the removal of liquidity from the US bond market", said Michael Shaoul, chairman and CEO of Marketfield Asset Management.

Brent crude prices hit $70 a barrel on signs of tightening crude stocks but settled off that level on Thursday, while a jump in energy shares helped lift US stocks. However, we believe USA inflation pressures are picking up. That's just how markets work.

"If the PBOC were to precipitate a large sell-off by retreating from the US Treasury market, the value of its existing reserves would fall". "We don't rule out the possibility that Beijing will seek to increase yuan flexibility, but the shift in policy will likely be modest and highly dependent on market conditions".

USA inflation data for December are due on Friday morning, with traders closely watching for hints (http://www.marketwatch.com/story/why-us-inflation-data-will-be-a-litmus-test-for-bond-buyers-2018-01-09) that consumer prices are picking up at a faster pace that could speed up the Federal Reserve's expected rate increases.

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