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In the midst of the recent bond-market turmoil, questions arose about whether China’s alleged dumping of Treasury bonds was contributing to soaring yields. Brad Setser, a former US Treasury official, has offered insights in an article for the Council on Foreign Relations, dispelling the mystery surrounding China’s Treasury holdings.
Setser highlighted that China is not engaging in a massive sell-off of its Treasury assets. While some reduction in Treasury holdings has occurred, he argued that the larger context, often overlooked, reveals a different narrative.
Key Points:
- Incomplete Data: Setser emphasized that official US data fails to account for a significant portion of China’s holdings. The reported decrease in China’s holdings, as reflected in Treasury International Capital data, only considers foreign holdings in US custodians.
- Stability Since 2015: Drawing on alternative sources, Setser estimated that China’s overall US-bond holdings have been relatively stable since 2015, contrary to the perception of a substantial sell-off.
- Offshore Custodians: Adjusting for Treasuries held by offshore custodians, China’s reported holdings of US assets appear to be stable, ranging between $1.8 and $1.9 trillion.
- Third-Party Management: The US data fails to capture assets held by third-party managers, such as global bond and hedge funds, as well as private-equity firms, overseen by China’s State Administration of Foreign Exchange.
- Shift to Agency Bonds: Setser noted a significant evolution in China’s reserves— a shift towards agency bonds. While there has been a reduction in Treasury holdings, China has increased purchases of agency bonds, surpassing $100 billion in 2022 and the first half of 2023.
- Misconception: The article challenges the misconception that a reduction in China’s Treasury holdings equates to a decline in the share of China’s reserves held in US bonds or the US dollar.
Setser concludes that the only notable evolution in China’s reserves in recent years has been the shift into agency bonds, urging a nuanced understanding of China’s dynamic investment strategy.
