China denies it intends to reduce US Treasury purchases

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China’s foreign-exchange regulator has denied that the country intends to slow or halt purchases of US government debt following a report that helped propel the benchmark 10-year Treasury yield to a nine-month high this week.

Bloomberg reported on Wednesday that senior, unnamed Chinese officials had recommended slowing or halting purchases of Treasuries, which deepened a sell-off in the world’s largest government debt market as investors anticipate tighter Federal Reserve policy this year.

China is the largest foreign holder of Treasuries at $1.2tn, according to official data, while many analysts of the $14tn market believe that the country also owns several hundred billion via other financial centres, such as London.

Some fixed-income strategists speculated that officials may have leaked the information as a warning to the Trump administration that Beijing could retaliate if the US adopts tough measures against what the White House views as abusive Chinese trade practices.

But the State Administration of Foreign Exchange on Thursday dismissed the report in a statement on its website. 

“We first learned this information from media reports. This information may be quoting from a source that is mistaken, or it may be fake information,” the agency said. SAFE invests foreign exchange reserves based on the principle of diversification and pursues safety and value accumulation, it added. 

Chinese government agencies do not normally respond to media reports, but such statements have become more frequent as authorities seek to improve communication, especially on financial issues. Last January, SAFE issued a statement denying an FT report that measures to combat capital flight were hampering trade flows.

Among its dollar reserves, China is believed to hold both Treasuries and mortgage bonds issued by Fannie Mae and Freddie Mac, as well as some high-rated corporate debt. 

Analysts say that despite political tensions or concerns about poor investment returns, China’s reserve managers have little choice but to maintain substantial US debt holdings. Given their sheer size, no other pool of safe and liquid assets is large enough to absorb such a large share of China’s reserves. 

“In recent years there have been many reports about China increasing or decreasing US debt holdings, but actually they are always small, marginal changes,” said Zhang Yu, head of overseas research at Minsheng Securities in Beijing. “US debt will definitely remain the primary destination for asset allocation.”

Apart from decisions on portfolio allocation, the Chinese government’s Treasury holdings have already fallen in recent years due to an overall fall in foreign exchange reserves. After reaching a record high of $3.99tn in June 2014, reserves dropped below $3tn to a five-year low in January 2017, as the central bank drew down reserves to support the renminbi exchange rate. 

Reserves have subsequently increased for 11 straight months, climbing to $3.14tn by December, as the renminbi rebounded and regulators imposed tighter foreign-exchange controls to prevent capital flight. However, recent reserve growth has been far slower than in the heyday of Chinese reserve accumulation. Reserves grew by $13bn per month on average since last January, compared with $42bn per month in 2013. 

The precise composition of China’s forex reserves is a state secret, but officials have previously said that the currency mix is broadly in line with the composition of global reserves as indicated by International Monetary Fund data collected from member countries. US dollar assets comprised 64 per cent of allocated reserves by the end of 2016, according to the latest data.

Additional reporting by Yizhen Jia

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