Many people know that China and the U.S. have always had a sort of rocky relationship. With the changes in leadership, the two countries have been involved in a couple of back-and-forth heated debates.
However, the Biden administration has been able to keep things calm between the two countries for years. Now, it seems things may be rocky again as China is cutting ties with many U.S. treasuries.
China Cuts Off U.S. Treasuries
The Chinese government has shocked the United States by cutting ties with many U.S. treasuries, leading to speculation that tensions may begin to rise again between the two nations.
The agency debt bonds are worth $53.3 billion. Many do not yet know why this is happening but there are many speculations that it is because Donald Trump could be the U.S. president again.
The State of China’s Economy
China is currently in a very confusing position. There is a current downward spiral in its economy, and there are several issues with the property market and also with its manufacturing industry.
Therefore, many economists and investors are concerned about the country’s situation and are trying to figure out their next moves.
China’s Foreign Reserves
China is the world’s largest holder of foreign exchange reserves, worth about $3.2 trillion as of April 2024. Experts estimated that about 60% of those funds were U.S. dollars, although the specific currencies are not public information.
However, a report on China’s stash after the first quarter has shown that the U.S. treasuries fell to under $40 billion, while the agency bonds also dropped to $10 billion.
Japan Holding U.S. Bonds
On the other hand, Japan is the largest foreign holder of U.S. treasuries, estimated at $1.1 trillion. However, this grew by $51.4 by the first quarter of the year. Therefore, many are curious to know why the funds with Japan are thriving and those with China aren’t.
Could the decline be due to China’s decision not to invest in bonds anymore or simply to the country’s loss of money?
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China’s Strategic Moves
The former might be the case, as reports also show that China is trying to strengthen its financial portfolio with many countries around the world with the exclusion of the U.S.
This is a very strategic move by the Asian country, and it can be highly beneficial for them in the future. However, the impact on the U.S. could be very disastrous.
Geopolitical Tensions
When China invested a large amount of its assets in the U.S., this placed the country in a tricky geopolitical situation. If an urgent situation arises in the U.S., the government would expect China to help due to their financial interests and trades.
Therefore, China’s decision to spread its assets to many other countries is a smart one that would reduce the country’s impact on geopolitics.
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Worries About Security and Interest Rates
The Chinese government has two main issues with the U.S., and they are attributed to the country’s security and interest rates. The security issue is because of the upcoming presidential elections, which could see Trump get back into office.
The U.S.’s interest rates are currently low, and China would prefer to do business with countries that have higher interest rates.
Wall Street Impact
Before China moved most of its finances elsewhere, it started by offering several financial deals to many countries that could help them get out of debt.
However, most of these countries, most of which are on Wall Street have noted that these deals were not in the best interest of the countries. Also, most of them were western countries.
BRICS Countries
However, China is not the only country that has offloaded U.S. treasuries in the past few years. Since 2022, the BRICS countries have done the same thing.
These countries include Brazil, Russia, India and South Africa. All five countries have been diversifying their reserves and reducing the dependency of their countries on the American currency.
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The U.S. Is in Debt
Since these countries are all part of BRICS, it is not a coincidence that they all offloaded the majority of their U.S. treasuries one after the other. However, this has had a negative impact on the U.S. as the country is now in a lot of debt.
As of the end of 2023, America’s debt was a whopping $34.4 trillion. Therefore, more countries that had financial interest in the U.S. have also started to pull out for their own safety.
High Tariffs
The U.S. has also been implementing tougher restrictions on China, which may be because of their financial differences. There are now higher tariffs on Chinese products imported into the country, most of which are on Chinese electric vehicles.
Other imported products like batteries, steel, aluminum and medical equipment are also facing higher tariffs.
Worries About a Possible Impact
Since China used to have one of the biggest holdings in U.S. agency bonds and treasuries, there are several concerns about how this will affect the U.S. economy. However, there may be no reason to panic right now because Japan and Europe now hold most of the holdings.
Their holdings are much bigger than China’s, and these investments may help the U.S. continue its normal economic activity.
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