Numerous articles reported China's selling of US treasuries and purchasing of gold. Often it is voiced by BRICS aficionados in an alarming tone for the US economy.
Watcher.guru reports

In addition, BRICS member China has sold another $25.1 billion during the Q2 of 2024. In total, China has offloaded $72 billion worth of US treasuries and agency bonds in the last seven months alone. Reports suggest that China is diversifying its assets and purchasing tonnes of gold to its central bank reserves.The World Gold Council reported that China and other BRICS countries have been the largest buyers of gold since late 2022. The gold accumulation began when BRICS kick-started the de-dollarization agenda to challenge the US dollar’s global supremacy. If other developing countries start following the BRICS agenda and dump treasuries, the US economy will be the hardest hit.

Such views demonstrate a complete lack of understanding of global finance and achieve nothing more than the pointless fearmongering of uneducated readers.
Here is why.

1. There is no "dumping" of treasuries. Someone always owns an asset. If China wants to sell, somebody is buying. From the US viewpoint, it doesn't matter who owns its debt. What matters is the price at the initial offering.

2. The liquidity characteristics of any asset are paramount. China's holdings and its monthly adjustments of US treasuries are marginal to impact the price. If China sells more aggressively it will punish itself.

3. China's central bank, the account people refer to, doesn't hold all of the treasuries China owns. A good chunk is held with other intermediaries. It's always been like that and it makes true accounting difficult. Оne account may show a decrease, while another, not directly linked to China, has an increase in holdings.

4. The fact that China owns so many treasuries results from a positive trade balance and capital inflows. When capital leaves China, its central bank must provide dollars. Thus, the selling of US debt is a consequence of capital flight. China's foreign exchange reserves fell by $44.83 billion in April 2024. At the same time, gold reserves increased by $6B, to $167.96B in total. Total holdings of treasuries are around $770B.

5. Gold is no real substitute. It's a much smaller market, hence it cannot efficiently absorb the amounts China divests from treasuries. Various measurements exist. The average daily trading volume (ADV) for gold is $149 billion. ADV for treasuries is $900B. China has been increasing its gold holdings over the past 18 months. Watch the correlation with the price of gold over the same period. The liquidity risk in action.

6. Gold could hedge a geopolitical risk (debatable) but it's a negative carry asset. Treasuries pay interest.

China's selling of treasuries is a byproduct of capital flight. Not the de-dollarisation strategy. Gold purchases are an irrelevant sideshow.

#finance
May 2024