China’s holdings of U.S. treasury bonds reached $780.2 billion in June, a gain of $11.9 billion from a month earlier, marking the second time this year that China has increased the holding since first addition in April, according to data released by the U.S. Department of the Treasury on Thursday. It was the largest increase in holdings so far this year.
China remained the second largest holder of U.S. government debt in June. In May, China reduced its holdings of U.S. treasury bonds by $2.4 billion, the fourth time in the year that it trimmed the holdings. China’s total holdings of U.S. Treasury bonds have been below $1 trillion since April 2022.
Dong Shaopeng, a senior research fellow at the Chongyang Institute for Financial Studies at the Renmin University of China, told the Global Times on Friday that China’s holding increase is a “normal market move” based on multiple considerations, including a potential interest rate cut by the U.S. as well as recent changes in the yields of U.S. treasuries.
In the short term, as a Federal Reserve interest rate cut approaches, China may scale up its allocation of short-term U.S. treasuries to mitigate the volatility risk associated with a rate cut, while correspondingly it tends to reduce holdings of long-term counterparts, Chinese analysts said.
They stressed that China remains on track in advancing its foreign exchange reserves diversification push. For example, China’s central bank has been increasing the proportion of gold in its forex reserves portfolio in recent years.
In June, Japan, the largest holder of U.S. debt, reduced its holdings of U.S. treasury bonds by $10.6 billion, with total holdings being $1.1177 trillion. The move comes as Japan, faced with depreciation pressure on the yen, has been reducing the holdings of dollar-denominated assets, including U.S. treasury bonds, so as to provide “ammunition” to stabilize yen’s exchange rate in the foreign exchange market.
According to observers, how countries will adjust their holdings of U.S. treasury bonds this year hinges on the prospect of U.S. economy.
The risks in the U.S. economy and its financial markets have been building up, triggering great concerns among global investors on dollar-denominated assets. The weaker-than-expected U.S. labor market data in July also added to investors’ anxiety.
JPMorgan Chase CEO Jamie Dimon said last week that he still believes that the odds of a “soft landing” for the U.S. economy are about 35-40 percent, making a recession the most likely scenario in his mind, CNBC reported.
