China's US Debt Holdings Fall Below $800B, Global Sell-off?

The U.S. Department of the Treasury releases the global holdings of U.S. Treasury securities as of the end of the previous two months in the middle of each month. For instance, the data announced in the early morning of November 17th Beijing time pertains to the holdings as of September 30, 2023. From the September data, it can be observed that there is a trend of "fleeing" from U.S. debt, especially among the top three foreign creditors of the United States.

Let's discuss our situation first. By the end of September this year, Mainland China's holdings of U.S. debt were valued at $778.1 billion, a decrease of $27.3 billion compared to the $805.4 billion at the end of August, finally falling below the $800 billion mark.

Japan, the largest holder of U.S. debt, had holdings valued at $1087.7 billion, with a reduction of $28.5 billion; the third-largest holder of U.S. debt, the United Kingdom, reduced its holdings by $29.2 billion.

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The top three foreign holders of U.S. debt collectively reduced their holdings by $85 billion in September. Japan and the United Kingdom, two staunch allies of the U.S., reduced their holdings even more, by $1.2 billion and $1.9 billion more than China, respectively.

On the other hand, the total market value of U.S. debt held by overseas creditors of the U.S. also shrank, decreasing from $7.707 trillion at the end of August to $7.605 trillion. This is the first decrease after three consecutive months of increases, with a total reduction of $101.6 billion, to which China, Japan, and the United Kingdom contributed significantly.

Incidentally, the U.S. debt balance has exceeded $33 trillion, and the cumulative holdings of foreign holders are around $7.6 trillion, indicating that the vast majority of U.S. debt is actually held by domestic institutions and individuals in the United States. This is quite different from the view propagated by some online self-media that the U.S. is mostly in foreign debt with very little domestic debt.

Is everyone reducing their holdings of U.S. debt? Is the U.S. fiscal system really on the verge of collapse? To cater to the emotional needs of netizens, I might say so, but as a finance blogger, I believe it is necessary to be objective.

The U.S. debt problem is indeed severe, but it may not be accurate to say that the world is dumping U.S. debt, as the reduction in the amount of debt held is not entirely due to active sales. Let's analyze the holdings of Mainland China in September as an example.

In another table released by the U.S. Department of the Treasury, U.S. debt is divided into medium and long-term U.S. debt and short-term U.S. debt according to the term. By the end of September, out of our $778.139 billion in U.S. debt holdings, $773.204 billion was medium and long-term U.S. debt, and $4.935 billion was short-term U.S. debt; at the end of August, the total was $805.366 billion, with medium and long-term U.S. debt at $793.507 billion and short-term U.S. debt at $11.859 billion.

In other words, the market value of medium and long-term U.S. debt held by Mainland China in September shrank by $20.303 billion, and short-term U.S. debt decreased by $6.924 billion, adding up to a total reduction of $27.227 billion (with slight differences after the decimal point), with the main reduction being in long-term U.S. debt.The U.S. Department of the Treasury releases detailed data on the monthly increases and decreases in medium and long-term U.S. Treasury securities. In September, Mainland China actively reduced its holdings of medium and long-term U.S. Treasury securities by $1.004 billion, which is significantly less than the previously mentioned market value reduction of $20.303 billion. Even compared to the active reduction of $14.867 billion in medium and long-term U.S. Treasury securities in August, there is a considerable gap.

Why doesn't the data released by the U.S. Department of the Treasury match up? Is it because the Americans' ability to fabricate is so poor that they can't even match the most basic data?

Obviously not. If they were really fabricating, there would be no need to let the top three U.S. Treasury debt holders have a significant reduction in their U.S. Treasury holdings in September. They could simply "create" data showing that everyone is increasing their holdings of U.S. Treasury securities, creating a thriving scene, right?

The reason the data doesn't match is that the reduction in the market value of U.S. Treasury securities is composed of two parts: active reduction and passive dilution.

The monthly increase and decrease in medium and long-term U.S. Treasury securities released by the United States belongs to the active reduction part. China sold $1.004 billion worth of medium and long-term U.S. Treasury securities in September, and even more in August, at $14.867 billion. This part is easy to understand. The remaining part of the $20.3 billion reduction in market value is due to the decline in U.S. Treasury prices and "evaporation," which is passive dilution.

The same principle applies to the United Kingdom, which had the most severe reduction in U.S. Treasury holdings in September. The market value of medium and long-term U.S. Treasury securities decreased by $36.148 billion, with actual sales of $19.648 billion.

Some friends may still not understand the difference between active sales and passive dilution. Let's illustrate with a simple example.

Assume that Zhang San held 10,000 shares of Company A in August, with a closing price of 10 yuan on August 31, and a holding market value of 100,000 yuan; in September, Zhang San did not buy or sell shares of Company A and still held 10,000 shares. On September 30, the closing price fell to 9.5 yuan, and the holding market value shrank to 95,000 yuan. Zhang San did not reduce his holdings of Company A's shares, but the holding market value decreased by 5,000 yuan due to the decline in the stock price of Company A. The reduction in the U.S. Treasury balance held by foreign creditors is similar.

From another perspective, this conclusion can be verified. Friends who care about finance should have heard about the recent significant increase in U.S. Treasury yields, right?

The yield of bonds is inversely proportional to their prices. The higher the yield rises, the lower the price becomes. This is why the world is worried about the U.S. Treasury yield rising too quickly. The price of the U.S. Treasury securities held in their hands is falling rapidly, and the paper losses are becoming more and more severe. Who wouldn't be worried, especially short-term speculators?In September, the yield on the 10-year U.S. Treasury bonds rose by 11.52%, resulting in significant paper losses for all investors holding medium to long-term U.S. Treasury bonds, whether they are institutions or individuals, with a considerable reduction in the market value of their holdings.

This is the truth behind the global creditors of the United States selling U.S. Treasury bonds in September. A small part of this is due to active reduction, but the main reason is the passive dilution caused by the decline in the price of existing U.S. Treasury bonds. It can be confirmed that a similar situation will be presented when the balance sheet of U.S. Treasury bond holdings by countries as of the end of October is announced next month, as the yield on U.S. Treasury bonds continued to soar in October (U.S. Treasury bond prices plummeted), with a monthly increase of 7.58%. The situation this month is different, as it has fallen by nearly 10% since November 1.

Therefore, we will see that the market value of U.S. Treasury bond holdings by countries in October will continue to decrease, and the holding amount in November may rise.

However, countries still attach great importance to U.S. Treasury bonds, especially major economies, and actively buying or selling more is based more on investment considerations. The changes in the amount of holdings in the medium and short term are mainly caused by fluctuations in the price of U.S. Treasury bonds. Only by understanding the truth can we view the increase in Mainland China's holdings of U.S. Treasury bonds objectively and rationally.