Market Realist – Implications of China being the largest foreign holder of US Treasuries
The graph above shows some of the largest foreign holders of US Treasuries (TLT)(IEF) of all maturities. As of November 2014, China (FXI) held Treasuries worth $1.25 trillion, the most of any other foreign holder. It’s closely followed by Japan (EWJ), which holds Treasuries worth $1.24 trillion. Other countries—Belgium, Brazil (EWZ), Switzerland, and the United Kingdom— hold much smaller quantities of US Treasuries, comparatively speaking.
China’s central bank is a major purchaser of US Treasuries, mainly because of its exchange-rate policy. The Chinese renminbi was pegged to the US dollar to protect the currency from appreciation, which would make Chinese exports unattractive. Remember, China is primarily an export-driven economy.
Since the US runs a budget deficit, it needs a way to finance it. It does this by issuing lots of Treasury bonds. All else being equal, buying US Treasuries increases the demand for them, which reduces their yields. This results in a general decrease in interest rates in the US.
So if China were to stop buying, or start selling these bonds, it would result in higher Treasury yields. For example, if China decided to inject a monetary stimulus to its slowing economy, it could sell some of the US Treasuries it holds to finance the stimulus.
If China decides to sell the Treasuries all at once, Treasury yields could spike due to sudden, excessive supply. The increase to interest rates in the US could cause volatility all over the world (QWLD).
Keep reading, as the next part of this series explains why China’s burgeoning per capita GDP (gross domestic product) is important.