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China would not use US bonds as a weapon amid rising tensions

By Karen Brettell and Karen Pierog

NEW YORK, Apr 1 (Reuters) – China is unlikely to significantly cut its purchases of U.S. Treasuries in the near term in the face of growing foreign exchange reserves, even as trade and geopolitical tensions between Washington and Beijing remain high, investors and analysts said.

The risk that China could slow down its bond purchases or sell part of its portfolio of more than $ 1 trillion is a matter of concern for investors in the face of the battle between the world’s two largest economies over issues such as trade tariffs. , geopolitical tensions and human rights violations.

US President Joe Biden last week compared Chinese President Xi Jinping to Russian leader Vladimir Putin, stating that both are supporters of autocracy. But he said Washington does not seek a confrontation with Beijing over differences in trade, measures that reduce democracy in Hong Kong, the treatment of the Uighur minority and the strengthening of the Armed Forces.

Relationship concerns arise in an environment that saw Treasury bond yields rise to one-year highs in March, amid new supply of debt to finance public spending and an approaching growing deficit. to all-time highs, showing no signs of slowing down.

But analysts say it would be difficult for China to ditch its bonds without damaging their value and suffering losses in the process.

“Despite everything we’ve seen in terms of rising tensions, we still haven’t seen China divest quickly. It’s not a weapon they can use without hurting themselves,” said Matt Gertken, geopolitical strategist at BCA Research.

If a problem like Hong Kong or Taiwan breaks out, then China “can use Treasury securities as a signal,” Gertken said. In that case, however, other countries may buy Treasuries out of concerns about global stability, which could boost demand for safe-haven bonds, limiting the impact, he added.

China’s foreign exchange reserves have grown in recent months as the yuan has appreciated, and that has increased its investments in US Treasuries, Morgan Stanley analyst Min Dai said in a recent report.

China has seen a strong rebound in exports in recent months, as it rebounded from COVID-19 business closures and imports of Chinese products into the European Union and the United States grew, thanks to fiscal stimulus measures. .

The most recent government data showed that China increased its holdings of US Treasuries to $ 1.095 trillion in January, up from $ 1.054 trillion in October, though it remains below the high of $ 1.32 trillion. which it reached in 2013.

Japan is the largest foreign holder of US debt, with $ 1.28 trillion in Treasuries in January. Until last week, the Federal Reserve had $ 4.92 trillion in Treasuries.

China’s holdings are also shrinking in percentage terms as the supply of US government debt grows and the Federal Reserve increasingly establishes itself as the largest player in the market.

“It’s definitely something I think we need to be aware of, but I’m not sure it’s as important as it used to be, given the size of the US debt stock,” said Brian Kloss, Brandywine’s fixed income portfolio manager. Global.

US outstanding debt rose to $ 21.65 trillion at the end of the year, from $ 17.19 trillion the year before and $ 8.29 trillion in 2010.

Another problem that would make it difficult for China to reduce its purchases of US bonds is that few markets are as liquid or low-risk as US Treasuries.

(Reporting by Karen Brettell and Karen Pierog; Edited in Spanish by Ricardo Figueroa)

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