Data purporting to show that China has been dumping its holdings of Treasury bonds have caught the attention of market bears and the financial press.
But one economist believes these claims have been greatly exaggerated. And he’s got the numbers to back this up.
In a blog post published this week that caught the attention of some on Wall Street, Brad Setser, an economist and senior fellow at the Council for Foreign Relations, showed that a popular U.S. government data series on holdings of U.S. assets by foreign buyers doesn’t tell the whole story.
Setser found that the only notable shift in the composition of China’s foreign securities haul over the past eight years — at least as far as the U.S. is concerned — has been that Beijing’s reserve managers have favored agency debt like mortgage bonds over Treasurys.
Although China has slightly pared back its Treasury holdings over the past two years, its total exposure to U.S. assets appears to have changed little going back to 2015, contrary to claims that China has been actively “de-dollarizing” as geopolitical tensions with the U.S. have flared.
“China has not been dumping its Treasury holdings, but people highlighting the TIC data to argue that China is dumping don’t understand the nuances of that data,” Setser said Thursday during a phone interview with MarketWatch.
“The small reduction in their holdings is most likely due to a decision not to reinvest the proceeds back into the market.”
Assuming Setser’s calculations are correct, it would mean the surge in Treasury yields over the past three months has had little to do with selling by one of the biggest foreign holders of U.S. debt securities.
To be sure, Wall Street bond-market analysts have more readily blamed the Federal Reserve’s monetary policy, stubborn inflation, and worries about the U.S.’s ballooning debt load as the primary drivers behind the selloff. But bearish voices on social media and elsewhere have fixated on signs of China selling to support their argument that foreign governments are souring on U.S. debt, potentially creating more problems for the U.S. economy.
Perhaps the most important piece of Setser’s analysis is this: China is widely believed to manage some of its dollar-denominated reserves through foreign custodians like Euroclear, based in Belgium, and Clearstream, which is based in Luxembourg. These entities handle the mundane tasks of warehousing and protecting securities. Based in part on their location, the finer points of their holdings aren’t as easily monitored by U.S. authorities.
Because of this, the monthly Treasury International Capital report — better known by the abbreviation “TIC” — data, seen as an authoritative record of countries’ holdings of U.S. securities, must be adjusted to incorporate some of these other foreign holdings.
Setser’s complicated methodology uses other U.S. data sets aside from the TIC numbers, while also adjusting for falling bond prices with yields on long-dated Treasurys touching their highest levels in 16 years this month.
The 10-year Treasury note
yield stood at 4.711% Thursday afternoon in New York, while the yield on the 30-year bond
stood at 4.887%. Both saw yields touch their highest levels since 2007 earlier this week.
His conclusion: China’s U.S. dollar assets have been basically stable since 2015 at between $1.8 trillion and $1.9 trillion. Roughly half of that is believed to be invested in U.S. dollar-bonds, with roughly 40% of that amount consisting of Treasurys.
According to the latest TIC report, which was released on Sept. 18, China’s Treasury holdings declined to $821.8 billion, the lowest level since May 2009. TIC data are reported with a two-month delay, so the September report covers data from July.