After Fed’s rate cut, will China dump or buy more US debt?
Continued diversification of reserve portfolio may be in order, but into what, and at what speed, are pressing questions
Foreign holdings of US Treasuries rose to a record high in July in anticipation of the Federal Reserve’s rate cut, data from the US Department of the Treasury showed on Wednesday.
China’s holding of US government bond assets dropped to US$776.5 billion in July from US$780.2 billion in June while remaining the second-largest foreign holder, after Japan.
Meanwhile, Japan’s holding reached the lowest point since October, falling to US$1.16 trillion in July from US$1.18 trillion in June. Singapore, however, raised its US Treasuries holdings to US$234.2 billion in July from US$219.6 billion in June, according to US data.
“China is likely to continue diversifying its reserve portfolio away from US dollar assets to assets in other currencies, and possibly gold as well,” said Tommy Wu, senior economist at Commerzbank.
“But the speed of diversification could be affected by market conditions at the time.”
The US Fed announced an interest-rate cut of half a percentage point on Wednesday – the first downward adjustment in four years, triggering large swings in US stocks and bond yields.
Driven by its revenue from exports, China’s official foreign reserves were the world’s largest at US$3.29 trillion in August, according to data from the State Administration of Foreign Exchange (SAFE).
“I doubt the People’s Bank of China will directly add to its foreign exchange reserves, not least because it won’t want to be accused of pushing down the value of the yuan, thereby exacerbating tensions with its trading partners,” said Julian Evans-Pritchard, head of China economics at Capital Economics.