China suddenly increased its holdings significantly.
On August 15, US Eastern Time, the US Department of Finance released the International Capital Flow Report (TIC) for June 2024, which shows that China increased its holdings of US treasury bond bonds by $11.9 billion (about 85.4 billion yuan) in June, and its total holdings increased to $780.2 billion, which is the largest increase in China's holdings of US bonds since this year.
Another significant change in this report comes from Japan. Due to the demand for foreign exchange intervention, Japan is continuously reducing its holdings of US treasury bond bonds. The report shows that in June this year, Japan's holdings of US treasury bond decreased by US $10.6 billion month on month to US $1.1177 trillion. This is the third consecutive month that Japan has significantly reduced its holdings of US Treasury bonds, with a total reduction of $70.1 billion (approximately RMB 503 billion).
At the same time, foreign investment is also significantly increasing its holdings of RMB bonds. On August 15th, data released by the State Administration of Foreign Exchange showed that in July, foreign investors increased their net holdings of domestic bonds in China by $20 billion (approximately RMB 143.5 billion), a 1.4-fold increase compared to the previous month. The enthusiasm of overseas investors to allocate RMB assets remains high.
China takes action
On August 15th Eastern Time, the US Treasury Department released the June 2024 International Capital Flows Report (TIC). The report shows that the scale of US treasury bond bonds held by foreign investors in June further hit a record high.
The two major signals appearing in this report have attracted market attention. Among them, China significantly increased its holdings of US treasury bond by US $11.9 billion (about 85.4 billion yuan) in June, and its total holdings increased to US $780.2 billion, the largest increase in China's holdings of US bonds since this year.
After this increase in holdings, China's holdings of US Treasury bonds have risen to their highest level since January of this year.
As the second largest overseas creditor of US treasury bond, China's US debt position has been less than US $1 trillion since April 2022, and the overall trend is to reduce its holdings. In January of this year, China reduced its holdings of US Treasury bonds by $18.6 billion and initiated a "triple decline". In February and March, it reduced its holdings of US Treasury bonds by $22.7 billion and $7.6 billion respectively, with its holdings reaching a new low since March 2009; In April, it increased its holdings of $3.3 billion in US Treasury bonds, marking its first increase in holdings in 2024.
It is worth mentioning that the latest increase in China's holdings of US bonds coincides with the time window before the sharp rise in the US bond market.
In June this year, the prices of US treasury bond bonds of all maturities ended higher. Stimulated by the increasing expectation of interest rate cuts in the market, the price of US Treasury bonds further surged in July and August. As of now, the yield of 10-year US Treasury bonds has fallen below the 4% mark, with the latest report being 3.915%.
Another important signal comes from Japan. Due to the demand for foreign exchange intervention, Japan is continuously reducing its holdings of US treasury bond bonds. The latest report shows that in June this year, Japan's holdings of US treasury bond decreased by US $10.6 billion month on month to US $1.1177 trillion. This is also the third consecutive month that Japan has significantly reduced its holdings of US Treasury bonds, with a total reduction of $70.1 billion (approximately RMB 503 billion).
As the largest overseas holder of US treasury bond, Japan's massive reduction of its holdings of US bonds is closely related to its intervention in the yen in the foreign exchange market.
Industry insiders indicate that Japanese authorities appeared to have intervened in the foreign exchange market multiple times in late April, May, and July, by selling US dollars and buying Japanese yen to boost the domestic currency. Some of the funds may have come from the US government bond portfolio sold by Japanese authorities.
Overall, in June this year, the size of US treasury bond bonds held by foreign investors further increased to US $8.210 trillion from US $8.132 trillion in May, a record high.
Among them, China, the United Kingdom, Canada, Belgium and France increased their holdings in June, while Japan, Luxembourg, the Cayman Islands, Ireland and Switzerland reduced their holdings of US treasury bond bonds that month.
Another key action
Amidst the massive increase in holdings of US Treasury bonds, the People's Bank of China has continuously suspended its increase in gold reserves, which has also attracted market attention.
According to the latest data released on the official website of the People's Bank of China, by the end of July 2024, the central bank's gold reserves had reached 72.8 million ounces (about 2264.33 tons), unchanged from the previous month. This is the third consecutive month that the People's Bank of China has suspended its increase in gold reserves.
Analysts believe that this may be related to factors such as the significant expansion of the recent rise in international gold prices. Against the backdrop of historically high gold prices, the People's Bank of China's appropriate adjustment of the pace of increasing holdings can help control costs.
However, some industry insiders believe that from the perspective of continuously optimizing the international reserve structure and cautiously promoting the internationalization of the renminbi, increasing the central bank's holdings of gold in the later stage may still be the main direction, and short-term fluctuations may be a better allocation node.
Meanwhile, the overall increase in gold holdings by most central banks around the world has slightly slowed down. Recently, the World Gold Council released the trend of gold demand for the second quarter of this year, showing that global gold demand (excluding field trading) was 929 tons, a year-on-year decrease of 6%.
Prior to this, facing risks such as high inflation and geopolitics, global central banks continued to diversify their reserve assets, and central bank purchases became a major driving force for the rise in gold prices. The World Gold Council (WGC) recently announced that in the first half of this year, the global central bank's new gold purchases reached 483 tons, a new record high. Türkiye and India are the top two buyers. Among them, India's gold reserves increased by over 9 tons in June, reaching a new high since July 2022.
The World Gold Council predicts that the recovery of investment demand in Western markets will to some extent compensate for the weak demand for gold jewelry consumption and the possible slight slowdown in central bank gold purchases compared to 2023.
Foreign investment explosion buying
It is worth noting that foreign investment is also significantly increasing its holdings of RMB bonds.
On August 15th, data released by the State Administration of Foreign Exchange showed that in July, foreign investors increased their net holdings of domestic bonds in China by $20 billion (approximately RMB 143.5 billion), a 1.4-fold increase compared to the previous month. The enthusiasm of overseas investors to allocate RMB assets remains high.
In addition, according to the data released by the Shanghai Head Office of the People's Bank of China on the 15th, as of the end of July 2024, overseas institutions hold 4.46 trillion yuan of bonds in the inter-bank market, accounting for about 3.1% of the total custody of the inter-bank bond market. In terms of securities, overseas institutions hold 2.24 trillion yuan of treasury bond, accounting for 50.2%, 1.09 trillion yuan of interbank deposit receipts, accounting for 24.4%, and 0.96 trillion yuan of policy financial bonds, accounting for 21.5%.
According to Xinhua Finance, from September 2023 to July 2024, the scale of interbank market bonds held by overseas institutions has continuously increased for 11 months, and the cumulative increase in holdings in this round has reached 1.28 trillion yuan.
From the perspective of participating entities, the domestic bond market has been attracting more overseas institutions to participate. In July, 7 new overseas institutional entities entered the interbank bond market. By the end of July, a total of 1139 overseas institutions had entered the market, including 572 through direct investment channels, 825 through the "Bond Connect" channel, and 258 through two channels at the same time.
The Chief Economist of CITIC Securities clearly stated that the continuous inflow of overseas funds into the domestic market, whether investing in stocks, bonds or other domestic RMB assets, fully reflects their sufficient confidence in the stability of the RMB value, as well as their optimistic expectations for the stability of China's economic fundamentals and financial environment.
It is believed that the Federal Reserve's interest rate cut is likely to be implemented within the year. Domestic bonds in China, with their relatively independent risk diversification function, are continuously attracting overseas investors. It is expected that foreign institutions will maintain an increasing holding trend in RMB bonds for a considerable period of time.