China cuts US Treasury holdings to lowest level since 2017

China has reduced its holdings on the US treasury bonds in retaliation to the unresolved US-China trade tensions. (AFP pic).

WASHINGTON: China cut its US Treasuries holdings to the lowest level since 2017 in March amid the trade dispute between the world’s two biggest economies.

It was only a slight reduction – the stake slipped by US$10.4 billion, the first drop since November – but that was enough to bring the position down to a two-year low of US$1.12 trillion, according to data the US Treasury Department released Wednesday.

China owns more US government debt than any other foreign nation, and slashing those holdings is viewed by some as a nuclear option albeit an unlikely one – in the worsening trade negotiations. Bond markets were jolted last year when China officials recommended slowing or halting purchases.

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The data preceded the recent deepening of the trade war between the US and China that’s rattled financial markets and cast a shadow over the global economy. Both sides slapped new tariffs on the other this month. The escalating conflict has stoked speculation that China could turn to other tools as leverage, such as selling US assets, though that option is often dismissed as improbable.

China’s share of all foreign-held US debt fell for the ninth straight month in March to 17.3% of the total, the lowest level since June 2006. Japan remained the second-biggest holder, with US$1.08 trillion in March, up from February’s US$1.07 trillion.

China’s holdings dropped even as foreign ownership of US debt rose to a record high of US$6.47 trillion, with overseas investors buying US$88 billion in March, more than any month since September 2011. The increase coincided with a rally in Treasuries, with benchmark 10-year yields touching a 2019 low of 2.34% in March.

“With hindsight, recall that some of the foreign demand could have exacerbated the large rally which concluded Q1,” wrote BMO Capital Markets strategist Jon Hill in a note after the release