• 2024-07-28
• News

U.S. Treasuries Surge; China Sells, Japan Holds Back

In recent years, the rivalry between China and the United States has intensified, spanning both the technology and financial sectors. As of September this year, the total amount of U.S. national debt has reached a staggering 36 trillion dollars, far exceeding the annual GDP of the United States. Coupled with the uncertainties in global economic development, China and Japan, the two largest holders of U.S. debt, have both chosen to reduce their holdings. Meanwhile, Musk, who is about to take office as the co-director of the Government Efficiency Department and has boasted about saving the U.S. government 2 trillion dollars a year, has publicly stated that the United States is rapidly heading towards bankruptcy. So, how is the current financial battle between China and the U.S. unfolding?

China Continues to Sell U.S. Debt

U.S. Treasury bonds have always been a rather unique presence in the global financial market, serving as an important barometer for global investment. For a considerable time, they have been regarded as a haven in the financial market, a go-to asset when the outlook is bleak. However, the situation has changed in recent years.

As of September this year, the total U.S. debt has reached 36 trillion dollars, equivalent to 1.31 times the annual GDP of the United States (taking the 2023 U.S. GDP of 27.36 trillion dollars as an example).

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The annual interest, without even delving into the calculations, is undoubtedly an astronomical figure. The U.S. government's spending and deficits continue to grow unabated, causing the debt to snowball into a massive burden for the U.S. federal government.

Against this backdrop, it is more than justified for China and Japan to reduce their holdings of U.S. debt.

In September, we reduced our holdings by 2.6 billion dollars, bringing our total to 772 billion dollars. This is something we have been doing over the past two years, with several considerations in mind.

First and foremost, as mentioned above, is financial risk aversion.

We buy U.S. debt because it is indeed safe and stable. However, when the global economy is sluggish and the United States is burdened by high debt, with the returns on U.S. debt becoming increasingly lower and the risks escalating, reducing our holdings of U.S. debt not only enhances the security of our foreign exchange reserves but also effectively avoids potential losses.

Next, we turn our attention to our domestic situation. While reducing our holdings of U.S. debt, we will focus more on domestic issues, using government policy-driven capital flows to assist and guide local debt clearance and promote the stock market.

Additionally, we have a significant move to allocate 10 trillion dollars to debt reduction. This funding will go to local areas to promote continued development in infrastructure construction innovation and entrepreneurship.

The effectiveness of this measure is quite apparent. In October this year, confidence in China's capital market has noticeably increased, with over 24 billion dollars flowing into A-shares, which is a very important signal.

However, while our reduction of U.S. debt is primarily for our consideration, the financial battle with the United States is also an undeniable factor. Japan, on the other hand, is not quite the same. As the largest holder of U.S. debt and an ally of the United States, it also reduced its holdings significantly in September, which somewhat feels like a stab in the back. So, why is that?

Time is Running Out for the United States

Japan currently holds over 1.1 trillion dollars in U.S. debt and is undoubtedly a heavyweight in U.S. debt investment. In September, not only did it not take over the more than 2 billion dollars that China offloaded, but it also sold off a substantial 5.9 billion dollars of its holdings, which also has its reasons.

First and foremost, of course, is the same risk aversion and loss reduction as us. On this basis, Japan has another very important purpose, which is to stabilize the yen exchange rate. This year, the exchange rate market has been quite volatile, with the yen兑dollar exchange rate once falling below 160.

For Japan, it is naturally necessary to stop the decline. The main measure Japan has taken is to raise its interest rates and sell dollars externally, ultimately aiming to stabilize its domestic financial market.

So, Japan's selling of U.S. debt is primarily for self-preservation.

The second reason is to deal with the persistent rise in domestic inflation. This year, Japan's core inflation rate has been rising continuously. The previous interest rate hike was intended to address this issue, and considering that inflation is still ongoing, it is highly likely that Japan will continue to raise interest rates at the end of this year, which requires sufficient liquidity reserves.

At this time, choosing to sell U.S. debt is naturally also in preparation for this.

However, while Japan may be comfortable with its actions, the United States is in even more distress. After all, its ally and the largest holder of U.S. debt has significantly reduced its holdings, only increasing the debt pressure on the United States. No wonder Musk has publicly stated more than once that the U.S. government is racing toward bankruptcy at an extremely fast pace.

Although everyone wants to change the current situation of the U.S. government's huge debt pressure and increasing deficits in the new term, the reality is that the United States has become somewhat entrenched.

Is the hollowing out of industry and embracing the virtual economy the price to pay? To truly reverse this situation, increasing the proportion of the real economy is almost a must. However, this is indeed difficult for the United States today.

Moreover, if they do as he said before and start with their allies, such "backstabbing" actions like Japan's will only increase in the future, and the decline of the dollar hegemony will only accelerate.

For the United States, America First is not a problem, but America first based on financial hegemony may ultimately backfire.

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