China is no longer the largest foreign creditor in the US: Why has the country sold $100 billion in US debt in the past six months?

Since 2010, China has held a total of more than $1 trillion in US Treasuries. But in the past six months, the world’s second-largest economy has sold more than $100 billion in US debt. This makes China no longer the largest foreign creditor of the United States. Where do these sales come from?

In May, China had $980.8 billion in US debt, down $23 billion from the previous month and about $100 billion from a year ago. The US Treasury reported this on Monday.

Japan, which reduced its US debt to $1212 billion in May from $1218 billion in April, is now the largest foreign creditor to the United States. The total value of US foreign-owned debt fell from $7.450 billion in April to $7.420 billion in May.

diversification

Sales show, according to financial analysts, that the Chinese want to diversify their currency reserves.

In addition, the series of Fed rate hikes that began earlier this year has lowered US bond prices, making them less attractive.

For example, the US central bank raised interest rates by 75 basis points in June. Wall Street generally expects a similar increase for its next meeting in July.

Why buy US debt?

Why has China bought so much US debt over the past two decades? The decades-long US trade deficit with China has a lot to do with this.

The world’s largest economy spends more on imported goods and services than it earns on its exports. This scenario is more extreme in the trade balance with the Chinese, the world’s two largest exporters. The Chinese government receives US coins from Chinese companies as payment for their exports. The Chinese state uses those dollars to obtain US bonds, among other things.

The The basics: When a foreign power buys such a government bond, it lends money to the United States government. The latter must repay the amount after an agreed period. In addition, the creditor receives interest on the amount paid.

oil

However, another reason why China continues to hold such a large portion of its global reserve currency portfolio is the oil trade. The majority of oil transactions are settled worldwide dollars. Let China now be the world’s largest oil importer.

In addition, we note for the first time that Russia, and not Saudi Arabia, is the main supplier of oil to China. Because of the sanctions imposed on the belligerent country in the West, Russia does not benefit from being paid in dollars for its oil …

(ns)