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China purchased the most Treasuries in six years in June, vaulting past Japan as the largest overseas lender to the US government, possibly taking advantage of recent weakness in the dollar in a rising US interest rate environment. Tuesday’s report from the US Treasury Department also signaled that China has steadily ratcheted up its accumulation of US government debt as it has burned far less of its foreign exchange reserves this year to defend the yuan currency.
In 2016, China spent nearly $320 billion of foreign exchange reserves in an effort to stem the yuan’s depreciation against the US dollar. In the wake of tighter capital controls and a weaker dollar so far this year, China’s forex reserves, the world’s biggest, have grown in line with its Treasuries holdings.
In June, China’s Treasuries holdings rose to $1.147 trillion, which was the highest level since September when it was $1.157 trillion. And in July, China’s currency reserves reached a nine-month peak at $3.081 trillion. “They may have reshuffled their portfolio a little bit and sold a few things. Maybe they think the dollar is attractive now and they increased those (Treasuries) holdings,” said Kevin Lai, chief economist Asia ex-Japan at Daiwa Capital Markets in Hong Kong.
The overall increase in reserves was due to weakness in the dollar, which has helped push up the value of non-dollar currencies in its holdings, China’s State Administration of Foreign Exchange said last week. Indeed, the People’s Bank of China remains a net seller of foreign currency, though net sales narrowed sharply to 4.647 billion yuan ($694.93 million) in July, according to central bank data on Wednesday.
The recent increase in Treasury holdings possibly also reflects an incentive to by US-dollar denominated assets amid rising US interest rates. The pullback in the dollar over recent months allowed for a relatively cheaper entry point. Before China returned to being the largest US overseas lender, Japan had held that spot for eight months. Japan held $1.091 trillion in US government debt in June, down from $1.111 trillion in May.
Japan’s drop in Treasuries holdings was the steepest since November, falling to a level last seen in December. Ireland was a distant third in holdings of Treasuries, with $302.5 billion in June, up from $295.8 billion in May.
Overall, foreign investors bought $19.73 billion in Treasuries in June, down from $46.37 billion in May, which was the most since June 2015. While there was speculation in recent years that China would use its massive Treasuries holdings to exert pressure on the United States, there has been little indication of that happening, even amid rising tensions between the two countries on issues ranging from trade to North Korea.
“The PBOC’s primary motivation is to manage the fx reserves in a way that makes sure they are held in safe and liquid investments and that they make a decent rate of return”, said Julian Evans-Pritchard, a China economist at Capital Economics in Singapore. “I don’t think the primary motivations are going to be political.”
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