The decline in China's US Treasury holdings isn't as big as it seems
- The ongoing decline in China's US bond holdings is not as big as it seems, according to Ned Davis Research.
- The firm observed that measuring China's total US bond holdings in the yuan shows just a 5% decline since 2013.
- "Although China's holdings of US debt are down, after some adjustments, it's a lot less than the headline implies," NDR said.
China has been reducing its holdings in US Treasurys since 2013, but the decline may not be as big as it seems, according to Ned Davis Research's global macro strategist Joseph Kalish.
In November 2013, China held $1.3 trillion of long-term US Treasurys. In August, it held $793.5 billion, representing a 40% decline. Rising bond yields have accelerated the drop in bond prices, also helping reduce the value of China's overall Treasury holdings.
But when measured in the yuan, China's shedding of Treasurys doesn't look as severe. That's because the yuan has depreciated by about 20% relative to the US dollar since November 2013.
"The decline of their Treasury holdings in yuan has been close to 27%," Kalish estimated in a research note last month.
While China could be sending a political message to the US by dumping Treasurys, it could also be looking for a better deal for its money in the credit markets.
China has been reducing its holdings of long-term US Treasurys by an average of $1.8 billion per month, but at the same time Beijing has been adding an average of $4.6 billion per month of agency mortgage-backed securities, which are guaranteed by US government agencies.
"Perhaps China wanted a higher yielding alternative to Treasurys with minimal added credit risk," Kalish said.
There's another factor to consider: China also likely holds some of its US bonds in overseas custody accounts in Belgium and Luxembourg.
"If we assume half of the holdings in Belgium and Luxembourg are really owned by China, that would add another $120 billion to China's holdings," he said. "The rationale for using these conduits is that when added to China's Treasury holdings, they closely track China's foreign exchange reserves."
So, when you combine China's increased holdings in agency mortgage-backed securities, the dip in US Treasury holding, and Treasurys it likely holds outside the US, then China's stockpile of US bonds is down 21% from its 2013 peak.
And when you convert those holdings into the yuan, its total decline is down just 5% since 2013.
"Although China's holdings of US debt are down, after some adjustments, it's a lot less than the headline implies," Kalish said.
One person who's not concerned about China reducing its Treasury holdings is US Treasury Secretary Janet Yellen.
Ahead of Chinese President Xi Jinping's trip to San Francisco, US Treasury Secretary Janet Yellen said "it would not be surprising" if China reduced its holdings of US Treasury debt in order to support its currency.