China increases holdings of US treasury bonds to $780.2 billion in June, a ‘normal market move’ amid forex reserves diversification push

By Global Times, Aug 16: China's holdings of US 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 US Department of the Treasury on Thursday. It was the largest increase in holdings so far this year.

China remained the second largest holder of US government debt in June. In May, China reduced its holdings of US treasury bonds by $2.4 billion, the fourth time in the year that it trimmed the holdings. China's total holdings of US 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 US as well as recent changes in the yields of US treasuries.

In the short term, as a Federal Reserve interest rate cut approaches, China may scale up its allocation of short-term US 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 US debt, reduced its holdings of US 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 US 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 US treasury bonds this year hinges on the prospect of US economy.

The risks in the US economy and its financial markets have been building up, triggering great concerns among global investors on dollar-denominated assets. The weaker-than-expected US 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 US economy are about 35-40 percent, making a recession the most likely scenario in his mind, CNBC reported.