In just over half a year, China sold off US$100 billion worth of Treasuries, or nearly 10% of its total holdings.

In just over half a year, China sold off US$100 billion worth of Treasuries, or nearly 10% of its total holdings.

The Chinese government is redistributing wealth. The value of China’s U.S. Treasury holdings in July was 9 percent lower than it would have been at the end of 2021, and in August, the country imported more gold than ever before. As a result of the dollar’s decline in value, the United States, Europe, and Japan have frozen the Russian Central Bank’s overseas assets, and China has stepped up its vigilance against dollar dependence. However, rapidly introducing new methods of asset management is challenging. Some U.S. Treasury Bonds can be held indirectly in tax havens (Tax Haven).

The U.S. Treasury Department reports that as of the end of July, China held $970 billion worth of U.S. Treasuries. Even though it’s up a little from last month, it’s been going down for seven months in a row now, and that trend is expected to continue through at least June. Trade deficits between China and the United States have been trending downward since 2018, and projections show that they will drop by $100 billion, or nearly 10%, in the first half of 2022.

Judging by the data for the first half of the year, this is the largest drop in China’s holdings in the 5.5 years prior to December 2016. On the other hand, U.S. Treasuries held in the emblematic tax haven of the Cayman Islands rose by $38.5 billion during the same time period, and those held in Bermuda rose by $7 billion.

China may have increased its implicit holdings of US Treasuries by transferring some of its reduced holdings. If you hold U.S. Treasury bonds implicitly, you can easily avoid sanctions when it is difficult to raise U.S. dollar funds by selling U.S. Treasury bonds.

Relevant individuals in China’s financial sector believe the purpose of the reduction in direct holdings of US treasury bonds is to avoid losses caused by rising US interest rates. China sees the freezing of the Russian Central Bank’s overseas assets as an opportunity to reduce its holdings of US treasuries, in addition to asset management based on market trends. To Chinese officials, being kicked out of the Society for Worldwide Interbank Financial Telecommunication in March, when the US and EU decided to impose sanctions on Russia, was a much smaller blow (SWIFT).

If most of China’s foreign exchange reserves of more than 3 trillion U.S. dollars are frozen as a result of financial sanctions from the United States, Europe, and Japan in response to extraordinary events in the Taiwan Strait, the impact on the economy will be devastating.

To the tune of 59%, China’s foreign exchange reserves were held in US dollars in 2016. Declining demand for U.S. Treasury bonds as a proxy for U.S. dollars reflects a diminishing reliance on the greenback for trade settlement and other purposes.

Russia’s trade with China now includes more renminbi settlement. On September 6th, Gazprom announced that rubles and yuan would replace the US dollar as the settlement currency for natural gas exports to China. The biggest bank in Russia, Sberbank, has started offering yuan-based financing.

According to SWIFT data, Russia overtook Hong Kong and the UK in July as the third largest recipient of RMB settlements made outside of mainland China. Buying fossil fuels from Russia in a currency other than the dollar has significant advantages for China.

China is considering a number of alternatives to the US dollar, and gold is one of them. General Administration of Customs of China data shows that in August, gold imports into China totaled US$10.358 billion, which is 2.3 times higher than the same month the previous year. That’s the highest number recorded since records began in 2017. Gold has the benefit of being easily liquidated and can be traded for any currency; it is also known as “stateless currency.” Distancing themselves from the United States, countries like Russia and Turkey are selling off their U.S. Treasuries and buying more gold.

The amount of gold in China’s reserves stayed around 1,950 tonnes between the end of September 2018 and the end of August of this year. Foreign exchange reserves and gold may still be held by state-owned banks and other financial institutions as a form of safety.

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