China Won't Use Treasuries to Warn Trump, Eurasia Group Says

Gladys Abbott
January 11, 2018

Bloomberg News, citing unnamed people close to the matter, said Chinese officials are considering slowing - or even stopping - its purchases of USA government debt.

Financial markets were jolted Wednesday by a report that China - the biggest foreign holder of USA government bonds - could curtail its purchases, a shift that has spooked investors already leery of a rise in interest rates at the start of 2018.

At the end of October 2017, China held $1.19 trillion of U.S. Treasuries, the most of any foreign country, according to the latest data from the U.S. Treasury and Federal Reserve Board. The debt is becoming less attractive compared with other assets and trade tensions with the USA may provide a reason for the shift, the thinking of the officials goes, according to the people.

The Chinese officials didn't specify why trade tensions would spur a cutback in Treasuries purchases, though foreign holdings of United States securities have sometimes been a geopolitical football in the past.

"You already had this backdrop of rising rates and people are getting nervous", says Boris Rjavinski, senior interest rate strategist at Wells Fargo Securities in NY. It isn't clear whether the officials' recommendations have been adopted.

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Treasury prices fell, boosting yields.

The S&P/ASX 200 index fell 0.5 per cent, or 29.1 points, to 6,067.60. Instead of just stopping its purchases of USA debt, it could start selling some of the paper it has. "Treasury financing needs are going to rise significantly in 2018 and beyond relative to recent history, so Treasury is going to be looking for as many sources of demand as they can find". "For years they have been bothered by the fact that they are so heavily invested in one particular class of USA bonds, so it's just a question of time before would try to diversify".

But the Eurasia Group analysts said that China had more targeted tools to pressure the USA and retaliate against trade measures.

"If China ceases to be a net purchaser of US Treasuries, this is unlikely to have a significant impact on the overall yield curve unless China divests a large share of its total holdings in a short time period", said Rajiv Biswas, Singaporebased chief Asia-Pacific economist at IHS Markit.

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