China: 'We will not halt United States bond purchases'

Stock Rally Tested by Rise in Yields; Yen Climbs: Markets Wrap

The treasury yields (return on investment) rise when bond prices fall, and so when the markets took a tumble on Wednesday, the yields moved to their highest level since March 15 past year, marking a 2.597 per cent return.

But why does China hold so much U.S. debt?

China's foreign exchange reserves, the world's largest, rose US$129.4 billion in 2017 to US$3.14 trillion, as tight regulations and a strong yuan continued to discourage capital outflows, data from China's central bank showed. It said investments in Treasuries are decided by market conditions.

"The dollar may fall to around ¥110" in the days to come, the official said. "I don't think that's worked out so poorly for the U.S".

Bloomberg reported that Chinese authorities were considering slowing or stopping the purchase of US Treasury debt, but China shot it down as "fake news".

President Donald Trump's administration is reportedly planning new tariffs, aimed at countering China's allegedly unfair trade practices.

The country is also the biggest foreign holder of United States government debt, with US$1.19 trillion in Treasuries as of October 2017, according to data from the Treasury Department.

All told, the three central banks are sitting on $14 trillion in securities they have bought since 2009: a $4.4 trillion mix of Treasuries and mortgage securities held by the Federal Reserve; the European Central Bank's $5 trillion in corporate and government bonds; and $4.5 trillion worth of bonds and exchange traded funds accumulated by the Bank of Japan.

The stakes may be higher now as tensions with the US have been building since the election of President Donald Trump, who's been critical of the American trade deficit with China and other countries.

The retail sector was mixed after the Australian Bureau of Statistics said sales rose 1.2 per cent in November, driven by the release of the iPhone X and promotions such as Black Friday. The consensus among analysts surveyed by Bloomberg is for little change in the yuan by the end of 2018, from its current level of around 6.50 per dollar.

Not only would such a step hurt China by decreasing the value of its bond holdings, it would wreak havoc in a global economy that the country is now fully integrated into through deep trade and financial links.

"If China ceases to be a net purchaser of US Treasuries, this is unlikely to have a significant impact on the overall yield curve unless China divests a large share of its total holdings in a short time period", said Rajiv Biswas, Singaporebased chief Asia-Pacific economist at IHS Markit.

US Treasuries later pared some of their losses and the 10-year yield stood at 2.555 per cent in early Asian trade.

The yen has risen this week after the Bank of Japan on Tuesday trimmed its buying of long-dated Japanese government bonds in market operations.

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