From US Bonds to Gold: China makes a switchover
According to financial market portal FX Street.com, China has begun selling U.S. bonds. According to news from the Federal Reserve, China sold US$22.7 billion worth of US Treasury bonds in February this year . China currently has a total of US$775 billion in US debt. China’s current holdings of U.S. bonds are still second only to Japan’s, but if this trend continues, China will soon fall to third place, behind the United Kingdom.
China’s selling of U.S. debt is gradual. In 2012, China’s holdings of U.S. debt peaked at $1.3 trillion. But after U.S. Treasury Secretary Janet Yellen said last month that she was considering the possibility of confiscating U.S. dollar assets belonging to the Russian Federation, China may sell off U.S. debt faster than before. Beijing understands that the United States may take the opportunity to do the same with Chinese-owned assets. Meanwhile China is hoarding gold. Gold is a reserve asset with no counterparty risk at all. The People’s Bank of China has reserved gold for 16 consecutive months, with new reserves exceeding 300 tons.
The question may arise: Since many investors around the world are buying U.S. debt in large quantities, will this bring any big trouble to the United States? The article points out that the largest holder of U.S. Treasury bonds is the Federal Reserve. As of the end of 2022, the Federal Reserve holds 35% of the total U.S. debt in the domestic market. The U.S. central bank artificially creates demand by buying and holding U.S. bonds. This pushes up prices and lowers yields, which in turn allows the U.S. government to borrow more money at lower interest rates.
But the fact is that the Fed is now continuing to reduce the number of bonds on its balance sheet in order to combat inflation. It can be seen that the reduction in demand for bonds from the largest domestic investor and the second largest foreign investor is a great threat to the United States. You know, in just half of fiscal year 2024, the U.S. government spent $522 billion on interest payments, an increase of 35.9% over the same period in fiscal year 2023. It seems that the Fed will have to return to the Treasury market and implement a new round of quantitative easing in order to monetize some of the federal government debt. But what follows is still the reappearance of inflation. The FX Street.com article concluded that this means that it is the American people who ultimately have to pay for the US government’s insatiable appetite.
