I keep seeing reports and articles saying that China is selling U.S. Treasuries.  Is this true?  There are obviously a lot of implications if it is true.

But according to U.S. government data, the Chinese central bank has reduced its holdings by only a minuscule amount.  Billions of dollars is not minuscule in our world, but it is when you consider that China still holds over 1.2 trillion dollars in U.S. government debt alone.

The latest statistics on foreign holders of U.S. debt were released on March 15, 2016.  China is still the number one holder, with Japan at number two.  The next highest is not even close to those two.

In 2015, China topped out its holdings in June with 1.271 trillion dollars of U.S. Treasury securities.  As of January 2016, this number stands at about 1.238 trillion dollars.  In other words, the People’s Bank of China is only down about 33 billion dollars in holdings from its peak last year.  Compared to January 2015, its holdings are down just over a billion dollars, which is negligible when you are talking about these amounts.

If anything, it is the Japanese central bank that has been selling off U.S. debt, or at least not rolling over maturing debt.  The Japanese went from 1.239 trillion dollars in holdings in January 2015 to 1.124 trillion dollars in January 2016.  There, you are talking about a reduction of more than $100 billion.

There has been talk for many years now – at least with some of the stuff I read and listen to – that China holds a card over the U.S. in being able to sell of U.S. Treasuries.  We are told it could collapse the bond market.  We are told that China is able to control the U.S. because of this leverage.

It might all be true if it weren’t for the fact that the Chinese central planners are a bunch of mercantilists.  They think they need to hold foreign debt and keep their currency down in order to prop up exports.  It does prop up their exports, at least in the shorter run, but it is done at the expense of the Chinese consumer, of which there are about 1.3 billion.

Meanwhile, the American consumer gets subsidized, in a sense, by having cheaper imports.

The bad thing about China owning all of this debt is that it also subsidizes the U.S. government, meaning the reckless spending habits of U.S. politicians.

If the Chinese (and Japanese) did not buy up all of this debt, then it would be up to the Federal Reserve and private investors to buy up most of it.  This would probably mean higher inflation and higher interest rates.  It would eventually mean less deficit spending by Congress.

For this reason, I really do wish the Chinese central bank would reduce its debt holdings.  Instead, it let’s the Fed get away with monetary inflation that does not lead to short-term increases in price inflation and interest rates.  There are other reasons this has happened as well (low velocity, excess reserves), but the Chinese buying of debt is a factor.

Putting yourself in China’s shoes, it is hard to say they are in control. It reminds me of the quote that if you owe the bank $100, that’s your problem.  If you owe the bank $100 million, that’s the bank’s problem.

The U.S. probably isn’t going to default on its debt to China any time soon.  But it will default in the same sense it constantly defaults on promises to the American people.  It will default through depreciation of the currency.  China will eventually get its 1.2 trillion dollars back, but it may not buy them much.

As of right now, China is holding pretty steady and Japan is reducing its holdings, although not drastically.  The Fed ended QE3 back in late 2014.  Yet interest rates have remained low.  There is demand for U.S. Treasuries, despite the lack of buying from the Fed and foreign central banks.

If anything, this indicates a recession is coming.  There is not an inverted yield curve yet, but long-term rates are staying down.  It may not have to invert for there to be a recession.  It has already flattened a bit.