China Is Moving Away from U.S. Debt (While Stocking Up on Gold)
Chart of the Week #15
As I told you recently, China’s holdings of U.S. government debt are at their lowest in decades. They’ve sold off around $266 billion in U.S. Treasuries over the last two years alone. That’s a sharp 26% drop.
But I realized this situation needed a follow-up for more context after a reader pointed out that, instead of really dumping U.S. debt, the Chinese might just be moving their investments into other types of U.S. debt with better returns—like agency bonds and such.
So, here I am with another Chart of the Week edition, showing this is just not true—China is definitely offloading U.S. debt across the board. Not only that, but as China cut back on its U.S. debt holdings, it ramped up its gold purchases. Take a look at the next graph, which shows China’s holdings of U.S. debt (treasuries + agency bonds) and gold as a percentage of its foreign reserves since 2015.
It’s no surprise that the inverse relationship between China’s gold and U.S. debt holdings became really noticeable around 2018, when the trade war with the U.S. started. As I mentioned previously, by 2019, China had given up its spot as the top holder of U.S. debt to Japan.
As for gold specifically, back in 2015, it was just 1.6% of China’s total foreign exchange reserves. Today, it’s about 4.9%. That’s a huge shift.
Right now, the People’s Bank of China (PBOC) officially holds about 2,264 metric tonnes of gold, or 72.84 million troy ounces. Back in 2015, it “only” had about 1,658 metric tonnes, or 53.3 million troy ounces. That’s a staggering 37% increase in less than a decade.
Meanwhile, during that same period, China’s holdings of U.S. Treasury and Agency bonds relative to its FX reserves have dropped from 44% to around 30%. You can see this clearly in the chart above.
The bottom line is that China’s move away from U.S. debt is real and part of a bigger strategy. Whether this will turn into a gold-backed yuan or something else down the road is still up in the air, but it’s definitely happening.
Great chart, as always. Any thoughts on the other development last week, the unwind of the Yen carry trade? If most of the Yen converted to dollars was then invested in T-Bills or bonds, the unwind of that trade may show up in upcoming auctions.
Thanks for this weekly feature. It's extremely useful.
China, like the other BRICS+ nations is amassing gold to back their Unit currency by 40% with gold. The BIS is encouraging and supporting all the BRICS+ nations in this. As Andy Schectman has pointed out, the BIS told their central banks to repatriate their gold from NY and London and keep it in their respective countries so they can back the Unit with it up to that 40%. When this fully materializes it will make the Unit a very strong and stable currency. When the international order of the day brings in a new financial system, they have often backed the new currency to 40% with gold (note Bretton Woods when it was backed by 25-40% gold). This ensures stability for the new currency. Europe also had significant gold quantities to back the debut of its Euro. Interestingly, according to James Rickards, a 40% gold backing of the current US$ (MI and M2) would give a gold price of around $27,000 per ounce. The question now is: Will we see the $ fall to that level in the near future? The BRICS+ will be discussing the implementation of the Unit next month in its next meeting and making an announcement the following month in October. We live in interesting times.