Foreign Capital Dives into US Amid China Bond Sell-Off

Against the backdrop of a sluggish global economy, China's economic data have been quite impressive. Last month, our country released economic data for the first quarter, with GDP surging by 4.5% year-on-year, successfully achieving a strong start to the year. Particularly noteworthy are the export figures for March, which have exceeded expectations. Compared to South Korea's exports, which decreased by 13.6% year-on-year, and Vietnam's exports, which decreased by 13.2% year-on-year, China's export growth not only achieved positive growth but also reached a high rate of 14.8% year-on-year.

Looking at the recently concluded May Day holiday, the scenic areas were packed with people, hotels were fully booked, and the consumer market heated up significantly, also delivering an impressive report card. According to data from the Ministry of Culture and Tourism, this year's domestic trips reached 274 million, a year-on-year increase of 80.3%, and domestic tourism revenue was 148.056 billion yuan, a year-on-year increase of up to 128.9%.

However, while the trade surplus continues to expand and GDP data accelerates its recovery, it is surprising that, alongside China's continuous selling of U.S. Treasury bonds, Chinese government bonds have also been reduced by foreign institutions. Data from the domestic central bank shows that, as of the end of March, the amount of Chinese government bonds held by foreign-related financial institutions was 3.2 trillion yuan, which is actually 80 billion yuan less than before.

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Why, despite such impressive economic data, are Chinese government bonds being reduced by foreign capital?Is it true, as some people claim, that a large amount of capital is flowing towards the United States, and U.S. Treasury bonds are more favored by these financial institutions?

The fundamental reason is the interest rate hike in the U.S. dollar.

Capital has always been profit-driven. Over the past decade or so, the United States has consistently implemented a low-interest-rate policy.

However, due to the pandemic, in 2020 the Federal Reserve started the printing press, initiating an unlimited quantitative easing mode, with the dollar flowing to all parts of the world, intending to once again harvest the entire world with dollar hegemony.

However, this round of quantitative easing in the U.S. unexpectedly led to a flood at home, with high inflationary pressures, almost out of control.

Because of the high domestic inflation, the U.S. found it difficult to continue harvesting with the dollar tide, and since last March, it had to raise interest rates aggressively one after another to avoid being harvested in reverse by other countries.

The result of this is that the interest rates in the U.S. market have soared straight up. After another interest rate hike this month, the U.S. federal funds rate has risen to 5%-5.25%.

This means that currently, as long as you deposit money in a U.S. bank, you can earn about 5% interest. Such a high interest rate inevitably leads to global capital flowing towards the United States.

This issue is not difficult to understand. We all know that investment inevitably carries risks, and the probability of making money cannot be 100%.

So, if you can deposit money directly into a bank and safely earn interest, with a return rate that is not bad, why not do it?Therefore, whenever the US dollar raises interest rates, financial institutions sell off foreign assets, cash out and deposit the money into American banks, trying to maximize returns as much as possible.

Moreover, this aligns with the original purpose of the Federal Reserve's interest rate hikes:

To repatriate the US dollar, reduce the amount of dollars in the market, control the inflow of money into the market from the source, and thereby curb inflation.

However, China's current one-year deposit interest rate is only 1.5%, and the corresponding bond yields will naturally not be very high. Therefore, considering solely from the perspective of interest rates, the US is indeed more attractive to global capital at present.

However, has the Federal Reserve's purpose of raising interest rates truly been achieved? The current speed of capital repatriation is probably far lower than the US's expectations.

One piece of evidence is that the US inflation level is still higher than expected, and another piece of evidence is that US Treasuries are being massively reduced. Compared to Chinese bonds, the reduction of US Treasuries is more worth paying attention to.

The world is accelerating the reduction of US Treasuries

According to data recently released by the US Department of the Treasury, China has reduced its holdings of US Treasuries for seven consecutive months, with the current position only at $848.8 billion, which is the lowest level since June 2010.

In addition to China, among the top 10 foreign creditors of the US, eight are selling.

It can be said that not only China is not buying US Treasuries now, Japan is reducing its holdings, and major banks around the world are also not buying. The total amount of US Treasuries held by countries has decreased from $7,655.9 billion to $7,402.5 billion, a drop of 3.31%.Why would U.S. Treasury bonds, as the most direct, most value-preserving and appreciating dollar assets with very strong liquidity, be acceleratedly sold off by countries around the world?

Ultimately, it's still a problem with the United States itself.

On the one hand, last year's Russia-Ukraine conflict, the United States' series of economic sanctions against Russia showed that its so-called "spirit of contract" is nothing more than a pretext for seeking its own private interests, directly triggering a collapse of trust.

Countries around the world have realized almost simultaneously that they need to gradually reduce their investment in the dollar and U.S. Treasury bonds, and they cannot hang on the tree of the dollar in the future.

After all, no one can guarantee that they will not be the next Russia, hit by the United States with the "financial nuclear big stick", and be powerless to fight back.

On the other hand, the Federal Reserve has been aggressively raising interest rates to curb inflation, but the results have not been very satisfactory. Although the CPI data in April has been reduced to 4.9%, there is still a certain gap from the target of 2%.

Especially with the successive explosions of Signature Bank, Silicon Valley Bank, and the First Republic Bank in the United States, everyone can see how bad the economic and financial situation in the United States is. Whether the banking industry will continue to explode in the future, and whether the financial dam will really collapse, no one can say for sure.

Since the U.S. Treasury bonds reached the limit of 31.4 trillion in January this year, the United States has been arguing about raising the limit of U.S. Treasury bonds to 50 trillion.

But now the key to the problem is that the tide of de-dollarization around the world has been set off. Even if the U.S. debt limit is really raised, who can take over?

Over the past few decades, the United States has repeatedly harvested the wealth of the world with the hegemony of the dollar, which can be described as invincible.Given the accelerating process of de-dollarization globally, it seems that the United States may truly be unable to continue playing this financial game.

In conclusion:

With the collapse of the US dollar's credit, more and more countries are realizing that the global currency market, currently dominated by the US dollar, is about to undergo a new change.

Therefore, compared to the negligible reduction in Chinese government bonds, the reduction in US debt by countries around the world is more worth paying attention to. The possibility of the United States smoothly getting through the current difficulties is extremely slim.