China Sells US Treasuries and Buys Gold

China is actively divesting from US Treasuries and shifting its investments toward gold, indicating a strategic move to lessen its reliance on the US dollar. This trend hints at China’s potential plans to anchor its currency, the yuan, or possibly the BRICS collective currency, with a gold backing.

In a notable shift observed in September 2023, China’s holdings of US government bonds diminished to their lowest level since May 2009, as reported by the US Treasury Department in mid-November. 2023.

Specifically, China trimmed its US Treasury portfolio by $27.3 billion, bringing it down to $778.1 billion in September 2023. This marked the seventh consecutive month of such sales.

This behaviour is part of a broader pattern where numerous countries are stepping back from US government bonds. Despite this trend, Japan remains the largest creditor to the US, followed by the United Kingdom. Both nations have similarly reduced their bond holdings, with cuts amounting to $28.5 billion and $29.2 billion, respectively, in September.

Historically, China was on a buying spree of US bonds, peaking in May 2013 with an investment close to $1.3 trillion in US government securities. This recent pivot towards selling US Treasuries and accumulating gold represents a significant shift in China’s investment strategy.

There has been a significant surge in bond sales among institutional investors, leading to a rapid decline in bond prices and a corresponding increase in yield (interest rates).

Since 2020, the United States has seen a dramatic rise in its national debt, accompanied by an expanded issuance of bonds. This surge is primarily due to a substantial budget deficit, necessitating the procurement of new financing. Additionally, the interest rates on these new loans are notably higher compared to those of earlier ones.

Read more on the topic: Global Debt Around the World: Which Countries Have Borrowed the Most?

Why is China Selling US Treasuries?

Several factors might explain why China is offloading US Treasuries. Three main reasons stand out.

Firstly, China could be aiming to bolster the yuan. By selling US bonds, China accumulates dollars, which it can then use to purchase yuan. This strategy helps enhance the yuan’s exchange rate. Since the onset of the coronavirus crisis, China’s economy has faced challenges, including a struggling real estate market, a decrease in trade exacerbated by the trade war with the US, and sluggish economic growth. In light of these challenges, China is likely seeking to prevent the yuan from depreciating significantly against other currencies in the global financial system.

Geopolitical tensions serve as another catalyst for China’s shift away from US Treasuries. The relationship between the US and China has significantly worsened in recent years, with the US increasingly leveraging the dollar as a tool in geopolitical strategies.

For China, seeking alternatives to the dollar-centric financial system presents limited options

Gold, as a precious metal, stands out as a viable choice. Physical gold is one of the few assets worldwide with enough liquidity to absorb investments amounting to tens of billions of dollars.

A third consideration might be dwindling confidence in US sovereign debt. The fiscal health of the US has seen a marked decline, a sentiment echoed by various rating agencies. This lack of confidence is partly why US government bond prices have plummeted, forcing the US to offer higher interest rates on its debt.

Interestingly, the total value of dollar-denominated assets in China’s reserves has remained relatively stable since 2015, hovering between $1.8 and $1.9 trillion. In light of this, China has strategically adjusted its portfolio by divesting from US national debt in favor of bonds linked to the US government or its enterprises, such as real estate firms Fannie Mae and Freddie Mac, which also yield higher interest rates.

China is Buying Up Gold

At the same time, China is actively accumulating gold. While official figures report China’s gold reserves at 2,191 tons by the end of September, there’s speculation that the true reserves could surpass 10,000 tons. Some analysts suggest that the actual figure might even range between 20,000 to 30,000 tons.

Several factors contribute to this phenomenon. Firstly, China has been the world’s leading gold producer since 2007. China have a strict prohibition on the export of domestically produced gold. Over 7,000 tons of gold have been mined within the country since 2020, with state-owned enterprises responsible for half of this output.

Read more about this topic here: Top 8 Gold Production Countries

Additionally, China is actively importing gold.

Estimates suggest that the country has imported at least 6,000 tonnes of gold since the beginning of the century

While a portion of this imported gold has found its way into the hands of Chinese citizens, it’s highly probable that a significant share is managed by the Chinese government through a variety of companies and institutions.

Supporting the notion of China’s covert gold acquisitions is the observation that in over half of the gold purchases disclosed by the World Gold Council involving central banks, the buyers’ identities remain undisclosed.

In 2023, central banks, such as the Bank of England, globally acquired the most substantial amount of gold recorded since 1967. This year, the pace of gold purchases has accelerated even further – while last year saw a total of 698 tons of gold bought in the first three quarters, this year, the amount has risen to 798 tons within the same timeframe.

Read more about the topic here: Central Banks Persisted in Record-Breaking Gold Purchases Last Year. But Why?

China Positions for Financial Power Shift: Gearing Up for a BRICS Common Currency or Gold-Backed Yuan

China’s acquisition of gold may signal preparations for a potential BRICS (Brazil, Russia, India, China, South Africa, and other developing nations) common national currency, or it could be part of a strategy to back the yuan with gold in the long term. The notion of a new reserve currency for the BRICS association, possibly supported by gold and other minerals, is gaining traction. Recent expansions of the BRICS group, including countries like Saudi Arabia, Iran, Ethiopia, Egypt, Argentina, and the United Arab Emirates, add weight to this speculation.

Although discussions about a unified currency have been ongoing for years without concrete progress towards its creation, there’s a noticeable shift towards conducting transactions in local currencies, thereby sidestepping the US dollar. For a full transition away from the dollar, the confidence in these local fiat currencies needs to be bolstered. Gold, with its long-standing reputation as a reliable store of value and foundational element of monetary systems, serves as an ideal medium to foster trust among nations and ensure the stability of their currencies.

While China might be contemplating a move to back the yuan with gold, such a shift could currently be implemented only to a limited extent. Even substantially larger gold reserves than the official figures suggest would not suffice to cover all yuan in circulation at the current exchange rate, indicating that China’s strategy may involve a phased or partial approach to adopting a gold standard.