China has cut its holdings by US$18.6bil to US$797.7bil as of the end of January from December. — China Daily
BEIJING: China may continue to reduce the share of US debt in its overall foreign exchange reserves amid its ramped-up efforts to diversify foreign asset portfolios, experts say.
In the short term, factors like changes in monetary policies by the United States and Japan may create more opportunities for profit from transactions in US Treasury bonds, leaving a reasonable range of fluctuations in China’s holdings of the US assets, they said.
Their comments came as the latest data from the US Treasury Department showed that China, the second-biggest foreign holder of US Treasury securities, cut its holdings by US$18.6bil to US$797.7bil as of the end of January from December.
Since April 2022, China’s holdings of US Treasury bonds have always been below US$1 trillion.
Tang Yao, an associate professor of applied economics at Peking University’s Guanghua School of Management, said that China will likely increase holdings of gold and other assets to further diversify its foreign exchange reserves, therefore ensuring safety and stability of its foreign exchange reserve market.
“In the long run, if there is no major change in China-US relations, I believe China’s holdings of US debt will likely be kept around US$800bil. As its holdings of other foreign assets are expected to increase, the weight of US debt in China’s overall foreign assets will likely decline,” Tang said.
“However, considering opportunities of trading US treasury bonds created by macroeconomic factors such as the paths of the monetary policy of the US and Japan, professionals at China’s central bank might be instructed to buy and sell the US Treasury bonds from time to time. Such trades would result in temporary increases or reductions in its holdings of the assets.”“These changes are symbolic of the normalisation of the Bank of Japan’s (BoJ) monetary policy away from an unconventional ultra-easing stance,” said Kyohei Morita, chief Japan economist at Nomura Securities, in a research report.
Nomura analysts hold a view that Japan’s inflation based on the core consumer price index will remain above 2% year-on-year toward the middle of 2025.
“We remain of the view that the BoJ will make an additional rate hike by raising the target of the unsecured overnight call from the current range of 0.0 to 0.1% to 0.25% in October 2024,” Morita said.
Tokyo-based Minmetals Japan Corp, a subsidiary of Minmetals Development Co, does business in the Japanese yen while trilateral trade is settled in US dollars.
“Considering the widespread expectations for the yen to appreciate, some Chinese companies in Japan are likely to convert a portion of their dollar assets into yen assets,” said Zhang Shuo, president of Minmetals Japan.“We hope to obtain professional guidance and financial instruments from banks in areas such as settlements involving the yen, the dollar and the yuan, to help us maximise our corporate profits.”
Meanwhile, financial authorities from the Chinese mainland and Hong Kong are mulling to facilitate international investors using their yuani bond holdings as collateral for other products linked to yuan-denominated assets to further promote financial opening-up.
Rico Leung, executive director of supervision of markets at Hong Kong’s Securities and Futures Commission, said the SFC is in discussions with mainland authorities on the feasibility of allowing international investors to use their yuan bonds, purchased through the Bond Connect, as eligible collateral for other yuan asset-backed products. — China Daily/ANN
