Numerous articles and Tweets have surfaced about China dumping Treasuries. First let’s investigate the rumors. Then let’s look at conditions in which China might dump dollar assets. 
Not China Dumping
Until the past week there was a relentless selloff in US treasuries that sent bond yields soaring.
Rumors and articles surfaced that China dumping Treasuries was the reason.
I discussed the situation on October 4 in Bond Bulls are Getting Crushed in a Relentless Selloff, It’s Not China
Has China sold any US treasuries? Likely not. Much of what China holds is hidden in State Owned Enterprises and custodied Treasuries.
No Net Sales
As I read the chart, there is no net sales since mid-2020 and only small, brief sales all the way back to 2018 with net accumulation since then.
Has the China Bid Stopped?
“Has the Chinese bid for Treasuries stopped? No. But China has shifted toward Agencies and holds more of its Treasuries in offshore custodians. This should be the definitive flow chart –not a chart change the valuation of US custodied Treasuries!“
That should have settled the matter. Unfortunately it didn’t. People kept posting the chart in Setser’s first tweet as if it represented the state of affairs.
Now that we have addressed the myth that China is dumping Treasuries, let’s address the fundamental conditions on why China might do so.
Under What Conditions Would China Dump US Treasuries and Agencies?
To understand when that might happen, lets step back further and ask “Why does China accumulate US assets in the first place?”
The answer is China runs a persistent balance of trade surplus with the US and most of the world in general. By default it accumulates foreign reserves, mostly held in US assets, Treasuries and Agencies, because those are the most liquid assets in the whole world.
If ever the US started exporting massive goods and services to China above and beyond what the US imports from China then the current conditions would reverse.
Capital Controls and Yuan Flight
China and Japan have both sold US dollars (yuan and yen respectively) to shore up their currencies hoping to stop capital flight.
As Japan shows, this tactic never works except in the short term. Japan has recently been forced to let bond yields rise.
In this respect, dumping dollars to shore up yuan or yen is an act of weakness, not strength.
Two Possible Conditions for Dumping
- China balance of trade surplus suddenly collapses and goes negative
- More dollar dumping to shore up the yuan
What about War?
The US would likely freeze China’s assets just as it did with Russia, weaponizing the US dollar.
The BRICS nations would like a way around dollar weaponization but it is far easier said than done for numerous reasons.
What Does China Do With a Dollar That’s No Longer Risk Free? Buy Gold?
On March 18, 2022, I asked What Does China Do With a Dollar That’s No Longer Risk Free? Buy Gold?
That led to a Q&A with Michael Pettis.
Q&A With Michael Pettis
Mish: Will China now hold more commodities and fewer dollars despite the pro-cyclical nature of it? More Euros or Yen over dollars? More gold?
Michael Pettis:
- “Given that so much of China’s “reserves” are now indirect and held by state-owned banks (all the increase since 2017) it’s hard to say what the currency composition of China’s reserves are.
- “Officially the US dollar is still by far the biggest component, but it is slowly declining.
- “I expect that this will continue as far as the official reserves go but, as you know, the hard part of reducing the US dollar component of your reserves is figuring out what the alternative should be, and with such high and growing reserves (once you include the indirect reserves at the state-owned banks) that is a very difficult question to resolve.”
Unprecedented Fed Action May Have Just Started a Global Currency Crisis
I discussed the loss of risk-free status in Unprecedented Fed Action May Have Just Started a Global Currency Crisis
In one quick order, the Fed electronically rendered Russia’s foreign dollar reserves worthless, or at least unusable for now.
Now, if you were in China’s shoes do you hold dollars or gold as reserves? What about metals?
We are not at a full blown crisis stage yet. And perhaps we do not get there this time.
But when trade wars like these start, history suggests major wars often follow.
What About the Dollar as Reserve Currency?
Someone must hold every dollar, every bond, every US treasury 100% of the time.
Oil priced in euros does not change that statement. That countries hold dollars, not euros, has everything to do with reserve math and nothing to do with perceived pricing units.
The Yuan Will Not Replace the US Dollar, Nor Will It Be Backed by Commodities
Don’t confuse a diminishing role for the US dollar with it’s demise as the global reserve currency.
It’s far too early for that. For further discussion, please see the above link.
What’s Next?
There is still no good way around holding US dollars. And even if there was, consider the Pettis comment “But, as you know, the hard part of reducing the US dollar component of your reserves is figuring out what the alternative should be.”
Dear delusional Bitcoin advocates, it will not be Bitcoin either. No major country will turn over currency trading to an algorithm. This especially applies to China because China has cracked down on Bitcoin because it is used in capital flight.
Meanwhile, please note the yuan does not even float and China has no bond market to speak of.
So unless you think the US will suddenly start exporting massive amounts of goods and services to China (or the yuan collapses and China “dumps” dollars for yuan), reports of China dumping will be false.
mish, your priorities are screwed up. the really big bucks and brains will go to rebuilding ukraine and gaza………fun fact, the best r/e for 21st century was investing in kabul and baghdad. trillions of money poured in. my russian “oligarch” banker pals turned me onto that early on after 9.11.01…………watch “trauma Zone”. free series on youtbube on how russians failed at communism and democracy, 1985 to 1999. i was over there in 90s, doing business. wild west stuff………………..go long uke and gaza r/e. follow the money.
link to asiatimes.com
Fiat currencies are only a potential claim on wealth, they are intrinsically worthless. They only exist as crypto’s exist – a digit on a screen – paper currencies are just
physical representations of the digits. The US dollar has, in some markets, lost nearly half its purchasing power against real estate in the last four years and has hyper inflated against crypto’s. The worlds debt will never be repaid.
We’ve been thoroughly fooled as to what wealth is and how the world’s monetary system benefits those who issue the currencies (ie. create them from nothing), at the expense of the rest of us. Caveat Emptor
Wealth is real assets. But dollars can buy real assets. If $ are worthless send them to me. Like it or not $ are money. Bitcoin isn’t.
the benjamin today buys a fraction of what it did just 5 short years ago, for most human primates daily needs. forget 10 and 50 years ago. it’s something, but it ain’t SOUND MONEY
Does it even make sense to follow this mantra: ” when will this and that happen”? After following gold newsmen like Peter Schiff, David Morgan, Eric Sprott, and Bob Moriarty I found that this is a worthless pursuit. It will suck up your life trying to guess what China will do. LOL. Best thing is to get simple and practice good investor psychology, or simple learn to be a good economist in your personal affairs. Bob is right on that part. It does not matter when China will dump that is a ridiculous effort.
Yield on 10-year Treasuries fell at the open, on a gap, for 3 days. While equity indexes gapped up, at the open, for the same 3 days. Unless China is buying U.S. equities, they weren’t responsible for dumping Treasuries.
MISH is missing 2 points. FX much more deep and liquid than bond market. so straight up USD held. and more importantly, China has already layed off the dollars going around planet purchasing and leasing on long term contracts, mostly raw materials, and farms and forests……and ports etc……..from date farms in sudan to rights to forests in brazil………..the chinese have layed off the paper……..this is big and correct. from the FX trading i do and chats….with direct players, to the economist newspaper that mapped it out in detail……..this is nothing new. been going on for 20 years…………..sometimes things aren’t what they seem. and sometimes everything you know, just ain’t so.
Gold bugs and crypto clowns laid bare. Now go peddle your wares elsewhere.
Gold bugs are just smart people Not sure why people would touch Cryptos though
Commodities, Mish. That’s the answer. Though, I don’t think they would do it because they want to, but because they might have to. It is reckless for China to keep its money with a country that considers it a threat and liberally uses sanctions, including some against it.
From a pure business point of view though, the dollar is still the best place to keep your reserves. The Euro almost collapsed at one point so it’s not really a viable alternative until they hammer out a real fiscal union, and the Yen is too small and Japan is unfortunately in a worse financial state than the US. Finally there is gold, but that market might be too small for them too.
I am confused. Are not these treasuries the same that Silicon Bank was holding (at least many)? So China will never dump these otherwise they will take a big haircut?
China as a country is very pragmatic, some would say inscrutable, in any case, the Chinese are not going to off-load UST’s into a shortage and at a low price. The 30-year is likely to double in price in the next couple of years ? Not bad for prime risk, even if DX falls below 90 ?
Well China can use those US dollars to build out their Belt and Road initiative. Also why not put some in gold. How much of a hair cut did they take on their long term bond holdings? I bet they don’t want to don’t want a repeat of that.
How much gold can they really buy?
A couple thousand tons at most (a ton is ~67 billion)? There just isn’t that much gold available for sale from central banks. More importantly, if they tried to massively increase their purchases, the price would rise dramatically (ala the Hunt brothers) making it harder and harder to buy more and more gold. Eventually once they stopped buying the price would likely crash causing them to lose money.
They also have to take delivery and store it long term (neither of which is easy and it’s definitely costly). Plus when they want to sell it, the reverse has to take place (they have to ship it and find someone who want’s delivery and can store it which isn’t a lot of countries)
So maybe they can buy 100 billion worth of gold but they hold almost 1 trillion in treasuries.
For a government taking delivery and storing gold isn’t difficult. They can just peg their currency to gold so they wouldn’t need to sell reserves, just provide them on demand, or if they don’t want to peg it maybe sell gold certificates that allow the gold to be redeemed on demand. There are a lot of ways you can be creative with this.
However, I do agree with you size of the gold market probably means it’s not enough for China.
If you don’t hold it, you don’t own it. Why would any country trust another country to hold their gold (I know many hold theirs now in the US and UK but after what’s gone on with the dollar, how many are questioning that decision)? More importantly, how does country A trust that country B still has the gold (wasn’t stolen, wasn’t traded to someone else). There’s no way anyone is trusting someone else to hold their gold and rely on certificates.
As far as taking delivery and storing. Go read the hoops that Venezuela went through to take delivery from the UK of only a few hundred tons. It was a major undertaking to ensure safe delivery. Plus to store it you need a very secure place where you can reliably trust the guards aren’t stealing it themselves.
Exactly why would they trust anyone indeed?
“… size of the gold market probably means it’s not enough for China.”
** at the current price. If China were ever to pivot their holding out of Treasuries and into another vehicle, that vehicle would necessarily appreciate in value with the massive buying from China while Treasuries would necessarily depreciate with massive selling. It doesn’t really matter what vehicle they might choose – FX, gold, bitcoin (not in the realm of reality, but mentioned for the thought experiment). The size of the market (or markets if they diversified) as it exists at the moment would naturally grow.
That said, I don’t expect to see China ever selling their Treasury holdings en masse. It’s just not their M.O. Letting holdings mature while they target other asset acquisitions seems like it fits their playbook better. Seems like they have been doing that over the last year or so as they have been acquiring gold and letting their Treasury holdings stay more or less level.
China just lent Egypt another billion. That will get them more influence and leverage over things like ports and possibly the Suez Canal once Egypt defaults. Bit like the port in Ceylon and Darwin and elsewhere.
And how many more billions will they invest in mining here in Australia? Or in Malaysia or elsewhere? A few hundred billion has already been invested and not hard to invest a few hundred billion more to acquire strategic minerals.
Brent Johnson reflects what Mish is saying here and I agree with them BOTH. Thanks, Mish!
But China *could* and *should* be constantly diversifying its markets, selling more to other countries in other currencies, so as to reduce US dollar holdings slowly
You can only sell to other surplus countries. Countries running deficits don’t have money to buy US treasuries.
More importantly, do you really think China want’s Peso’s over Dollars in their holdings? Which one is more likely to lose value?
I think a bigger threat would be if the boj loses control of their interest rate suppression they will repatriate their USD assets mainly treasuries. M
Yea, and this would be a black swan event for the vast majority of people………BIG Crash.
The share of Chinese holdings is shrinking to irrelevance even as the nominal value is stable, and they know it. When the printing gates were open, China complained about her holdings being diluted, and were told to suck it up by Bernanke (as were all of us). Sure the amount of treasuries is growing as the deficits pile up, but it’s not Chinese buying.
Someone must hold every dollar, every bond, every US treasury 100% of the time.
Yup. Someone must.
Question becomes, who would want to when unpayable debt is the leading driver of GDP.
“Somebody” is often the FED which has to sop up bad bond auctions. If the takedown is weak, the Fed will dump stocks and drive buyers to treasuries . Then the FED can prop up the surplus of debt with a fake bid.
The Fed has zero stocks to dump and QE is incompatible with QT – So NO!
Ill volunteer to hold a few million
Jerry Powell is cornering the market. He thinks.
1) The Shanghai Cooperation Org might get in trouble after Oct 7 2023. US and China might enter a recession.
2) If so, stocks will drop, but US treasury prices will pop.There is no reason to invest in commodities b/c China industrial sector, RE and infrastructure are behind the curve.
3) The black dotted line might drop to a higher low, testing 2016 low.
4) The more US treasuries China has, the better they can handle their foreign debt.
That higher low might be a spring to test 2013, 2010 and 2010 highs.
About a month before they invade Taiwan.
China will not invade Tiawan unless US meddling forces the issue. Morons in the US exported our manufacturing base to China and allowed for massive tech transfer. Now the US is angry because China won’t jump to Uncle Sam’s command. What fool thought they would. I don’t blame the Chinese. I blame our short sighted grifting politicians.