Beijing Selling Off US Treasurys Is a Sign of China’s Economic Weakness

• China has sold some of its US Treasurys recently, and the stockpile has hit a 14-year low of $835 billion.
• That’s a sign of weakness, according to Carson Group, as it shows China is trying to prop up its yuan currency.
• “The reality is that China needs the US more than the other way around.”

China has been selling its US Treasurys over the past few months, but it’s not a sign of economic strength and it won’t hurt the US, according to a Tuesday note from Carson Group.

Beijing’s holdings at the end of June hit a 14-year low of $835 billion amid mounting evidence that the post-COVID economic rebound is fizzling.

The country is likely selling its Treasurys to prop up the yuan, which continues to weaken against the US dollar, according to Carson Group.

To help boost exports, China historically kept the currency relatively weaker by buying US bonds, Carson Group’s global macro strategist Sonu Varghese pointed out.

But the yuan could now be getting too weak for Beijing’s comfort. In early 2022, one US dollar was equivalent to about 6.3 yuan, but the exchange rate has weakened to 7.28 yuan today. The decline is a reflection of China’s deteriorating economy, and that’s having a pile-on effect for the currency.

“The problem now is that capital is trying to leave China because of slowing growth. That puts downward pressure on their currency, more than they would like,” Varghese said.

Youth unemployment has soared above 20% in China, deflation has set in, and it now takes an estimated $9 invested to produce $1 of GDP growth, up from $5 a decade ago. And to top it off, the US has been reducing its imports of Chinese goods over the past year, instead relying on other emerging market countries like Vietnam, Philippines, and India. 

China’s recent drawdown of its Treasury stockpile equates to selling dollars and buying yuan, Varghese said. “It’s a sign of economic weakness more than anything else.” 

He added: “The reality is that China needs the US more than the other way around. The US economy is reliant on consumption, and that’s internally generated demand. Whereas China is very dependent on investment and exports, and for that they need demand outside to be strong.”