China's US Debt Holdings May Be an Ace Card in Trade Dispute

China's US Debt Holdings May Be an Ace Card in Trade Dispute

China added to jitters on Wednesday as Bloomberg News reported that government officials are discussing whether to slow or halt USA bond purchases as part of a review of its foreign-exchange holdings.

China, the biggest holder of US government bonds, is reported to be considering a halt to purchases of US Treasuries and thereby the financing US government expenditure. Today, the State Administration of Foreign Exchange (SAFE) published a brief note (in Chinese) on its website denying there was any planned change.

China's decisions on foreign exchange holdings, as well as its investments in US Treasuries, are market-driven, he explained.

The investment strategies discussed in China's review don't concern daily purchases and sales, said the people. Furthermore, others argue that for China's own financial stability, they need to hold a lot of U.S. Treasuries - still perceiving the U.S.as the most trusted safe haven in the first world (strong private property rights, market depth liquidity and transparency relative to other sovereign debt).

The US Treasury yield edged down to 2.5366 percent from Wednesday's close of 2.549 percent, while the dollar gained 0.3 percent to 111.72 yen after the regulator's comment.

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Bond veteran Bill Gross says a bear market has begun, read about that here.

"Given possible US protectionist measures, it makes sense for China to preemptively flag that it holds some important cards, which could restrain the USA actions", Alan Ruskin, global co-head of foreign exchange research at Deutsche Bank, said in a note. An appreciating currency in 2017 helped the country rebuild its foreign-exchange reserves.

The Chinese move comes just as the USA prepares to boost its supply of debt.

President Donald Trump's tax-cut package will reduce federal revenue by more than $1 trillion over the next decade, even after accounting for their beneficial effects on the USA economy, according to Congress's tax scorekeeper.

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