As the Chineseaccumulate more and more gold, they’re dumping U.S. Treasuries.
That raises an important question: who is going to keep funding the federal government’s borrowing spree?
China offloaded another $22.7 billion in U.S. Treasuries in February, according to the latest data from the Federal Reserve. That dropped its total holdings to $775 billion.
China still ranks as the second-largest foreign holder of U.S. debt, but the U.K. could soon overtake China and slide into the second position if the current trend continues.
Japan ranks as the biggest foreign U.S. creditor with $1.17 trillion in Treasuries. The U.K. comes in third with $700.8 billion in U.S. Treasuries.
China has been divesting itself of U.S. debt for several years. The country’s Treasury holdings have fallen to their current level from around $1.1 trillion in 2021. Chinese investment in U.S. debt hit a 14-year low in October.
Renmin University finance professor Zhao Xijuntold the South China Morning Postthat the selloff will likely continue.
“China’s overseas investment has been concentrated on U.S. Treasuries in the past, [but] there is space for the Chinese government to further cut back its holdings in the future.
China is intentionally minimizing its exposure to the dollar. Chinese policymakers have seen howthe U.S. uses the dollar as a foreign policy weapon. Last month, Janet Yellen floated the idea ofseizing Russia’s frozen dollar-denominated assetsand giving them to Ukraine.
The Chinese aren’t dumb. They realize the U.S. could put the same kind of squeeze on them. So, if you recognize something makes you vulnerable, what do you do?
You minimize the vulnerability.
In other words, if you are concerned that the U.S. could pull the "dollar rug" out from under you, why not pull out from the dollar system first?
This seems to be China’s strategy.
Meanwhile, the Chinese are stockpiling gold, a reserve asset that carriesno counterparty riskat all.
The People’s Bank of China has added gold to its reserves for 16 straight months, adding over 300 tons of gold to its stash since it resumed reporting gold purchases in October 2022.
And China may hold far more gold than it officially reports. As Jim Rickards pointed out on Mises Daily back in 2015,many analysts believe that China keeps several thousand tons of gold“off the books” in a separate entity called the State Administration for Foreign Exchange (SAFE).
A big problem for the UStreasury
China’s Treasury dump underscores a big problem for the U.S. Treasury.
The federal government is runningmassive deficits month after month. If China and other countries spurn U.S. debt, who is going to fund this borrowing spree?
Foreign investors make up about one-third of the market for U.S. Treasuries. You could argue that there is still plenty of capacity in the domestic market. The problem is thelargest domestic U.S. bondholder is also out of the market.
That’s the Federal Reserve.
In fact, no entity holds more U.S. bonds than the Fed. As of the end of 2022, the Fed owned 35 percent of all domestically held Treasuries. Fed Treasury holdings totaled over $6 trillion.
The Fed generally keeps its big fat thumb on the bond market. By buying and holding U.S. bonds, the central bank creates artificial demand, driving prices higher than they otherwise would be and keeping yields lower. This allows the U.S. government to borrow more at lower interest rates than it otherwise could.
The problem is the Fed is out of the market right now. The central bank is allowing Treasuries to roll off its balance shed with a quantitative tightening policy meant topush down price inflation.
So, if the biggest player in the domestic Treasury market and the second-largest player in the foreign Treasury market are selling bonds, who is going to absorb them all, along with the new debt issued by the U.S. Treasury month after month?
This is one of the reasons Treasury yields continue to climb despite hopes of a Federal Reserve rate cut. And that’s a big problem given that the U.S. government has shelled out$522.02 billionon interest payments just halfway through fiscal 2024. That's a 35.9 percent increase over the same period in fiscal 2023. The only category with higher spending was Social Security.
It seems likely the Fed will have to jump back into the Treasury market with another round of quantitative easing to monetize some of the federal government’s debt. The problem isthat’s inflationary.
That means you and I are ultimately going to pay for all this throughan ever-increasing inflation tax.
Money Metals Exchange and its staff do not act as personal investment advisors for any specific individual. Nor do we advocate the purchase or sale of any regulated security listed on any exchange for any specific individual. Readers and customers should be aware that, although our track record is excellent, investment markets have inherent risks and there can be no guarantee of future profits. Likewise, our past performance does not assure the same future. You are responsible for your investment decisions, and they should be made in consultation with your own advisors. By purchasing through Money Metals, you understand our company not responsible for any losses caused by your investment decisions, nor do we have any claim to any market gains you may enjoy. This Website is provided “as is,” and Money Metals disclaims all warranties (express or implied) and any and all responsibility or liability for the accuracy, legality, reliability, or availability of any content on the Website.
FAQs
The process of deglobalization is accelerating, and China is dumping US Treasury Bonds. Metal prices, including gold and copper, are spiking to record highs, indicating an unfolding deglobalization-induced inflationary shock.
Is China dumping US Treasuries for gold? ›
As the Chinese accumulate more and more gold, they're dumping U.S. Treasuries. That raises an important question: who is going to keep funding the federal government's borrowing spree? China offloaded another $22.7 billion in U.S. Treasuries in February, according to the latest data from the Federal Reserve.
Why is China buying up all the gold? ›
Beijing is buying up gold to diversify its reserve funds and reduce its dependence on the U.S. dollar, long considered the most important currency to hold in reserve. China has been reducing its U.S. Treasury holdings for more than a decade.
Why is China selling US bonds? ›
Some former Chinese officials have suggested reducing Treasury holdings to mitigate exposure to perceived risks from increasing U.S. debt levels. This has led to speculation that China may be seeking to diversify away from the dollar and U.S. assets.
How much US Treasuries are owned by China? ›
Foreign holders of United States treasury debt
Of the total held by foreign countries, Japan and Mainland China held the greatest portions, with China holding 797.7 billion U.S. dollars in U.S. securities. Other foreign holders included oil exporting countries and Caribbean banking centers.
What would happen if China dumps US Treasuries? ›
If China (or any other nation that has a trade surplus with the U.S.) stops buying U.S. Treasuries or even starts dumping its U.S. forex reserves, its trade surplus would become a trade deficit—something which no export-oriented economy would want, as they would be worse off as a result.
Who owns the gold in the US Treasury? ›
The average fineness is 916.7. Under the currency reforms enacted by Roosevelt, the federal government owns the gold and holds it as security for $11 billion in gold certificates issued, in book-entry form, to the Federal Reserve Banks.
Why is US stockpiling gold? ›
Although money is no longer backed by gold, governments still store vast amounts of bullion to protect against hyperinflation or other economic shocks. The United States holds the world's largest stockpile of gold reserves by a considerable margin of over 8,100 tons.
Why is the US government buying gold? ›
Central banks purchase gold to diversify their reserves and gain liquidity from a ubiquitous asset without credit risk. For institutions and governments with long time horizons, gold's unique characteristics make it a natural option as a reserve asset and store of value.
Is China stockpiling gold? ›
According to Bank of America data, China, Poland and Singapore led the central bank gold purchases in 2023; The world's second-largest economy has led the pack, stockpiling gold for the 17th straight month.
In Japan, currency also plays a role in reduced appetite for U.S. Treasurys. The yen is at a decades low, and some investors think it might rise as interest rates rise in Japan. If the currency does strengthen, that would eat into the value of investments in Treasurys.
Does the Chinese government own US Treasury bonds? ›
China owns less than 3% of all outstanding Treasuries, the smallest share in 22 years, and again substantially down from the record 14% in 2011. Granted, China also likely holds Treasuries via other countries like Belgium.
Who is buying US treasuries? ›
The buyer base for US Treasuries has shifted from yield-insensitive buyers (sovereign wealth funds and central banks, including the Fed) to yield-sensitive buyers (US households, US pensions, US insurance), see chart below.
Who is dumping treasuries? ›
China has offloaded USD 22.7 billion in US treasury bills recently over concerns over security and a further delay to expected interest rate cuts by the American Federal Reserve, amidst its intensified strategic rivalry with Washington.
Is China dumping Treasuries? ›
China is not dumping its stockpile of US bonds, Brad Setser, a former Treasury official, wrote. A large part of China's holdings is not accounted for in official US data, he said. While it has sold some Treasurys, Beijing has bought up US debt in the form of agency bonds.
Is China moving away from the US dollar? ›
China has pursued de-dollarization — efforts to reduce global reliance on the U.S. dollar for trade and financial transactions — through partnerships with non-Western regional and multilateral groups, such as the Shanghai Cooperation Organization (SCO) and BRICS, by advocating for the use of local currencies in ...
Does the US Treasury still have gold? ›
Although money is no longer backed by gold, governments still store vast amounts of bullion to protect against hyperinflation or other economic shocks. The United States holds the world's largest stockpile of gold reserves by a considerable margin of over 8,100 tons.
Is there gold in the US Treasury? ›
The U.S. Treasury-Owned Gold dataset provides the amount of gold that is available across various U.S. Treasury-maintained locations. The data shows whether the gold is held in deep storage or working stock, that is, available to the U.S. Mint as raw material for the creation of congressionally authorized coins.
Does China have more gold in the US? ›
For those with short attention spans who don't want to read to the end of the article, I'll cut straight to the chase: China has much more gold than it says it does. In fact, China has more gold than the US. Its enormous gold hoards are all part of its grand global reserve currency status designs.
Is the US going gold backed? ›
Since the 1970s, most countries have run on a system of fiat money, which is government-issued money that is not backed by a commodity. The US dollar is fiat money, which means it is backed by the government, but not by any physical asset.
