As the yuan stabilises, China is gearing up to increase its holdings of US Treasuries – under the right circumstances.
Speaking to Bloomberg, people familiar with the matter confirmed this, but did not specify the exact circumstances for continuing a run of purchases that has extended to two months through March, after reductions in all but one of the previous eight months. China has maintained the trend, said the people, who asked not to be identified because they aren’t authorised to comment on the matter publicly.
The yuan climbed more than 2% against the dollar this year, after plunging 6.5% in 2016 in its biggest decline in more than two decades.
While China reduced its ownership of Treasuries last year by the most in data going back to 2000 as it sought to defend the yuan, it has since changed strategy and added to its holdings in the two months through March. Policymakers have also recently signalled support for the currency, with a senior central bank official saying on June 6 that the nation is looking to promote yuan globalisation and the government announcing on May 26 that it’s considering changes to the currency’s fixing mechanism to reduce volatility.
“When the yuan appreciates, China has the opportunity of building up its foreign reserves as the market has been concerned about the reduction of the reserves,” said Tommy Ong, managing director for treasury and markets at DBS Hong Kong Ltd. “Buying US bonds will help boost confidence, as officials want to show that any anxiety about yuan weakness or devaluation was excessive. They don’t want the exchange rate to appreciate or depreciate in a large magnitude before the Communist Party congress later this year.”
In March, China increased its holdings of US government bonds, notes and bills by $27.9bn to $1.09 trillion, the latest data show. Adding a $3.7bn rise in Belgium’s ownership, which is often seen as a home to China’s custodial accounts, the total increase was the biggest since 2014.