This wall was not built out of Treasury bonds. Photo by Lintao Zhang/Getty Images.
For years, politicians and pundits have warned the US relies on China for debt-financing, and if China ever decides to sell, Uncle Sam will be out in the cold, with sky-high interest rates and a crippling debt crisis. Well, China has sold a bunch this year, and new US Treasury data out Wednesday show selling picked up steam in July, with China dumping as much as $82.7 billion. Total foreign holdings of US debt fell nearly $100 billion. Yet interest rates didn’t soar—they fell. China, for all its alleged clout, is actually a bit player in US Treasury markets. Fisher Investments’ latest number-crunching shows investors needn’t fear China’s actions causing a debt crisis and ending this bull market.
Exhibit 1 shows China’s estimated monthly US Treasury buys and sells, based on the Treasury’s monthly report of foreign transactions. Since China does much of its maneuvering through Belgian proxies, it is hard to pin down exact figures. Here, we’ve simply added China and Belgium together, which likely overestimates China’s activity, considering Belgium has its own foreign exchange reserves to manage, but it illustrates the point and more or less represents the maximum.
Exhibit 1: Estimated Monthly Buying & Selling by China
Source: US Treasury, as of 9/18/2015.
Yet Treasury yields have fallen over this same period—and stayed tame in August and September, as China continued selling dollar-denominated assets (presumably US Treasurys) to defend its currency.
Exhibit 2: 10-Year US Treasury Yields
Source: FactSet, as of 9/18/2015. 10-Year US Treasury yields, 7/31/2014 – 9/17/2015.
China might be America’s biggest foreign creditor, but it is far from the single biggest owner of US debt. That honor goes to the Treasury, which owns nearly $5 trillion of America’s nearly $18.2 trillion debt load.[i] The Fed owns another $2.5 trillion.[ii] US investors (banks, pension funds and other institutions, mutual funds, individual investors and all the rest) own around $4.5 trillion. China owns between $1.2 trillion and $1.4 trillion, depending how many of Belgium’s holdings are really China’s. The higher figure gives China about 23% of foreign-held debt, but only about 7.7% of total US debt. That is not a lot. Japan owns only slightly less, at 6.6% of the load. No one fears Japan dumping US debt, and fears of China doing the same aren’t any more real.
China gets a lot of press, but US Treasury markets are simply too deep and liquid for its actions to hold much influence. China’s peak selling month was last November, when it sold as much as $287 billion. But total average daily volume in US Treasury markets that month was $489.7 billion.[iii] November 2014 had 19 trading days, so roughly $9.3 trillion worth of Treasurys changed hands that month. China’s selling represented about 3.1% of the total. July’s numbers tell a similar story. Average daily trading volume was $463.1 billion, and there were 22 trading days.[iv] That brings total monthly volume to nearly $10.2 trillion. China’s $82.7 billion in net sales is 0.8% of that total. Like we said, China is a bit player.
While China might sell more Treasurys to defend the yuan looking ahead, demand from US and other foreign investors remains robust. Treasurys are widely seen as the world’s most stable liquid asset. Banks use them to shore up balance sheets. Retirement investors use them to dampen volatility and supplement cash flow. Most of the world’s central banks keep piles of Treasurys in reserve.
With Chinese President Xi Jinping arriving next week for a State Visit—and with 2016 Presidential campaigning only just heating up—don’t expect the China-debt-dumping narrative to die. Politicians seldom let facts get in the way of a good populist sales pitch. But don’t confuse stump speech rhetoric with actual market risk. This is a ghost story, nothing more.
[iii] Securities Industry and Financial Markets Association, as of 9/18/2015. US Treasury Average Daily Trading Volume, 2001-2015.