China looks to dump US bonds

By Rhod Mackenzie

Yu Yongding, a former adviser to the People's Bank of China (PBOC), suggests that Beijing should gradually decrease the proportion of US government bonds in its foreign exchange reserves. Additionally, it is necessary to increase imports to balance foreign trade and reduce its vulnerability to risks associated with American public debt.

According to Bloomberg, the foreign exchange reserves of dozens of countries hold US government bonds worth $18 trillion, which is equivalent to 70% of US GDP. Furthermore, as the US national debt continues to grow, this ratio may increase to 100%.

However, Yu emphasises that the appeal of Treasuries overseas is diminishing due to weaponisation. This refers to Washington's deliberate actions to use the dollar as a tool to exert pressure on other countries and blackmail them. Primarily, this involves financial sanctions, which America frequently employs.

Beijing's foreign exchange reserves exceed $3 trillion, with a significant portion invested in US government bonds and other types of government debt. This massive amount is the result of a large trade surplus. The reserves are stored abroad to earn higher returns and to avoid strengthening the Chinese currency if converted into yuan, which would be detrimental to the Chinese economy.

According to the US Treasury Department, the value of Treasuries in China's reserves fell significantly in September, following the news that the Fed would maintain a high interest rate for longer than expected. China is the second-largest holder of American public debt, after Japan. Some analysts speculate that due to the strained relationship between the United States and China, Beijing may sell off American government bonds from its foreign exchange reserves. However, it is unclear whether PBOC is currently doing so, according to Bloomberg. It is worth noting that Beijing's significant purchases of US government debt have helped to maintain the high yields on US government bonds.

Yu Yunding is certain that if China decides against the purchase of US treasuries, it will need to maintain a trade balance and balance of international payments.
Yu believes that it will be necessary to accept the trade deficit for some time, but the Chinese economy should not depend on demand abroad.

He suggests that Beijing should pursue an expansionary monetary policy to maintain relatively high economic growth rates and protect foreign exchange reserves and assets located abroad.

On December 17, Xinhua News Agency, the government's news agency, published an article on the government's economic policy in 2024, emphasising the need to reduce the share of Treasuries in foreign exchange reserves. The Celestial Empire has ample time next year to strengthen monetary and fiscal policies, given low inflation and the relatively low level of public debt of the central government.