Did China Reduce Its Holdings of U.S. Treasuries?

I have been seeing stories about China (the government, that is) selling off its holdings of U.S. Treasuries.  The problem is that I have seen these stories in the past without the data supporting them.

The U.S. Treasury puts out a monthly report on the major foreign holders of U.S. Treasury securities.  China and Japan have been the top two holders for a long time, and by a wide margin.

Japan and China each hold over $1.1 trillion in U.S. government debt.  The next closest is under $300 billion.

The latest report was released on October 18, 2016.  It shows China’s holdings in August 2016 at $1.185 trillion.  This is down from the month before at $1.219 trillion.  In one month, the holdings have been reduced by about $34 billion.

This isn’t insignificant, but it isn’t earth shattering either.  It certainly isn’t a massive selloff.  The Chinese, as with anyone, can just let their debt mature and not roll it over.  You can reduce your holdings without actually selling.

October 1st marked the beginning of the Chinese yuan being included in the IMF’s basket of currencies called the Special Drawing Rights, or SDRs.  The Chinese government is trying to be a major player on the world stage.

I don’t buy the speculation that the yuan is going to replace the U.S. dollar as the world’s reserve currency.  The yuan is not even a freely floating currency, not to mention that the economy in China is very shaky.

The dollar is not going to be replaced by anything, unless it is gold.  The dollar may slowly lose its status as the reserve currency of the world, but nothing but gold is likely to take its place.

In our digital world today, there really isn’t a need for a currency to serve as a reserve currency for the world.  Countries can trade their own currencies.  If the Russians wants to buy from the Chinese, there is no need for them to use dollars as a middleman, as long as there are foreign exchange markets.  This is why it is inevitable that the yuan will eventually be freely floating and openly traded.

In terms of central bank policy right now, the Federal Reserve is better than all of the other major central banks.  The Fed has had a tight money policy (despite the low interest rates) for about two years now.  The central banks of China, Japan, and Europe are all creating money out of thin air at a rather staggering pace.

This is one of the main reasons that the dollar is strong.  It is also a reason that the dollar will not be replaced on the world stage.

I usually don’t recommend that you buy foreign currencies (for Americans) unless you really know what you are doing.  In our current environment, I wouldn’t recommend it at all unless you are looking for pure speculation in smaller regions.

The U.S. dollar will likely remain strong as long as the Fed keeps its monetary policy tight.  Of course, this could change rather quickly with a downturn in the economy.

A strong dollar will make it difficult for gold to run a lot higher.  Gold has been down in recent weeks.  I am still bullish in the long run on gold, but we shouldn’t expect a major run at this time because of the strength of the U.S. dollar.

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