A recent Bloomberg news story seems rather alarming for US financial markets. According to the financial news conglomerate, China sold a record $53.3 billion worth of Treasurys and agency bonds in the first quarter of 2024. As the chart above depicts, this accelerates a longer trend of China selling. Bloomberg also reported that “the country is piling into gold, which now makes up the highest share of its reserves since 2015…This is seen as diversification away from US dollar assets,…and is escalating the country’s pivot from dollar-denominated assets.”
However, it is not just China. Hong Kong, which China now controls, sold $32 billion of treasuries in the first quarter, a decline of 13.7%. Putting the two together, there was a whopping $80 billion of Treasuries sold in three months’ time. That is decidedly not good at a time when the Treasury needs to fund an enormous increase in the US deficit of approximately $2 trillion this fiscal year. Ordinarily, you would think that a sharp decrease in demand for US Treasuries from the second biggest foreign holder of US debt would lead to higher US interest rate levels.
However, at least for now. the rest of the world is stepping up to the plate and more than offsetting the sale by China. In the first quarter of this year, the Grand Total of Foreign Holdings of US Treasuries (see link below) rose by $145.3 billion, a 1.8% increase. This increase in total foreign purchases helped strengthen the US dollar, which is up about 4% this year. We might add that gold, which is mostly priced in US dollars, had risen by as much as $340 an ounce from its December year-end closing price on Monday of this week. That was a record high, and it approximates to a 16% increase for the current year; so China has done very well, financially, by selling our treasuries and buying gold.
However, we think the selling of Treasuries by China may have more ominous implications. We have said before in our blog that China has seen how the United States seized Russian assets after the Russians invaded Ukraine. Our bet has been and is that China will not allow that to happen, and it will unload much if not all of its Treasury assets before it invades Taiwan.
Speaking of that possibility, it may not be a coincidence that this past week, immediately following the inauguration of Taiwan’s new President, China launched military drills encircling Taiwan, involving dozens of warships and fighter jets carrying live missiles and rockets. Chinese state media said that the military force had been dispatched to conduct mock strikes on high-value military targets, and many observers in the region say it is a marked escalation of military tension.
On another, and perhaps related note, here’s a conspiracy theory for you, and it’s all of our own making. We recently saw a headline story that indicated that migrants are increasingly rushing to cross the US border, because they are afraid Donald Trump may win the Presidency and actually do something to shut down illegal crossings into this country. Could China be thinking along the same lines? Our liberal friends may think we are crazy, but it remains true that Russia did not invade Ukraine, and Hamas did not invade Israel while Trump was President. Those horrific wars started while Joe Biden was President. Will China risk waiting for a possible and unpredictable Trump presidency, or will they invade Taiwan while an increasingly frail Joe presides over our military, and the country is bitterly divided in this coming election.
Recently, the President signed a law giving Taiwan $8 Billion in military aid. Will China wait for all the military armaments to be delivered? Their increased military provocations in surrounding Taiwan does not promote visions of peace and harmony. The US government statistics showing foreign holdings of US Treasuries securities are always two months behind, but we’ll still be watching for signs of increased selling by the Chinese and Hong Kong, and we’ll also be watching the price of gold for another possible clue.
Finally, here is a question all Americans should be asking all Presidential candidates. President Biden has said more than once that the United States will defend Taiwan if China invades. We think an invasion is more than a slight possibility, so what does the President mean by that? Will he send warships or troops? Will he respond with a missile attack? How would the other candidates react?
The American people deserve to know before they vote.
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