Market Pulse: May 20, 2024

Lou Brien has been with DRW for almost a quarter century. From his position at the company, as Strategist/Knowledge Manager, Lou keeps an eye on the Fed in particular and the economy in general. He likes to say that he looks behind the headlines to examine the finer points of the data in order to not only know where the economy is, but where it is going.

Just checking in on China…

China owns $767 billion US Treasuries…oh, wait, that may or may not be true.

Better said, $767 billion US Treasuries were being held in China as of March, according to the Treasury report on international capital flows released last week. The Treasury tracks where its paper is being held, but not who owns it. That being the case, there are things left unsaid by this Treasury report. For instance, it is possible that Chinese entities, such as the government or banks, own all $767 billion of the Treasuries being held in that country, in addition to Treasuries held elsewhere; $767 could be the starting point, not the end. Chinese entities might own a piece of the $728 billion that are domiciled in the United Kingdom, or maybe a fair share of the $399 billion pile that has a home in Luxembourg; but then again, maybe not, you get the idea. Having said that, and thereby knowing that there are some moving parts to this data…

As of March, $767 billion US Treasuries were being held in China.; that is the smallest amount held there in fifteen years. In November 2013 there were $1.316 trillion Treasuries held in China, the most ever. Therefore, the latest reading is down about 42% from the peak. The amount held in China is not insignificant, only Japan, where $1.188 trillion Treasuries are housed, has more. But the decline in the Chinese total is notable.

However, China is not setting the trend. When the Treasury position held in China was at its record high in November 2013, the total amount of Treasuries held outside the US was $5.717 trillion. As of March the total of foreign held Treasuries is $8.092 trillion, or 41.5% higher than it was ten and a half years ago. When the Chinese Treasury position was at its peak, 28 percent of foreign held Treasuries were held in China. Now the China held percentage of all foreign held Treasuries is down to 9.5%. Once again, a notable decline.

China did not accumulate Treasuries until it started to trade more actively with the US, beginning around the turn of the century. The Treasury position grew as China steadily increased their trade advantage. For the most part, US trading partners buy Treasuries to store their dollar profits or bide time until they put the dollars into play to buy commodities such as crude oil.

Additionally, foreign central banks hold more dollars, by far, than they do any other currency in their foreign exchange reserves. Large FX reserves indicate the ability of a country to defend its currency if need be and signal they will be able to meet their international financial obligations. Holding Treasuries allows the central banks to earn interest on their dollar position. China has the largest FX reserves of any country, $3.2 trillion, give or take. But that is twenty percent off the peak of nearly $4 trillion, set in June 2014; a peak, by the way, that was set just seven months after the top of the hill for Treasuries held in China. The percentage of China’s FX reserves that are in dollars is only guesswork, China doesn’t tell. Most estimates put the dollar percentage of China’s reserves somewhere around, or a bit over, the percentage of dollars in overall global FX reserves, which is 58%.

The dollar percentage of global FX reserves has been on a roller-coaster since the end of the Bretton Woods regime in the early seventies. To be sure, the dollar percentage has always been considerable in relation to all other currencies that are held in reserve, and furthermore, the current level is not a historical low. But the consistent downtrend in the last couple of decades should not be ignored. It is not a secret that China wants to minimize its use of the dollar, and, additionally, challenge the ubiquity of the dollar in general. The long-term plan for China is to de-dollarize, full-stop. And I think it’s reasonable that some of the charts presented here are indicative of China’s big picture machinations. This is not to say that China and its currency are ready for their close-up; that’s not the case, not close. But China is not the only country that wants the dollar to lose at least some of its stature. China’s BRICS cohorts come to mind.

The dollar is the crown jewel of the US financial system, and so maybe in this regard it can be said that uneasy lies the head that wears the crown. Fed Governor Waller suggested as much when he opened the Fed’s conference on the International Role of the US Dollar earlier today:

The dollar remains, by far, the most widely used currency across a variety of metrics, including as a store of value and a medium of exchange. However, the role of the United States in the world economy is changing, and finance is always changing, so I think it is important for policymakers to regularly consider if and why the dollar’s role might change as well.