Is China Really Dumping US Treasuries?

Authored by Lance Roberts via RealInvestmentAdvice.com,

“China is dumping US Treasuries to get out of the dollar.” This claim has been circulating the mainstream feeds lately, with the narrative that the“end of the dollar is near,”or“the US will lose its funding base”and the“bond yields will surge.”But are those claims valid? Such is what we will explore in more detail.

Let’s start with the chart that has everyone concerned. As shown, China’s holdings of US Treasury bonds have fallen from nearly $1.2 trillion to $600 billion, or a 50% decline. On the surface, you can certainly understand the reasons for concern, as the decline in holdings over the last decade supports a clean storyline.

However, the problem is the step between observation and conclusion.A lower line item for“China, Mainland”does not equal a forced sale, it does not prove intent, nor does it prove a structural exit. What it does show is a lack of understanding about the dynamics of reserve currency management, and, in the case of China, the need to protect those reserves.

Let’s start with the Treasury Department, which states that the holdings tables are built“primarily on the basis of custodial data.”That phrase matters.Custodial data records where securities are held for settlement and safekeeping.Critically, the custodian is not the same as the beneficial owner, and that distinction undermines the headline narrative.

The Treasury’s own FAQ is the most important in this particular narrative:

“If a Treasury security purchased by a foreign resident is held in a custodial account in a third country,the true country of ownership will not be reflected.”

The system is designed to track where the bonds sit, not whose balance sheet carries the risk.This is crucially important when it comes to the narrative that China is dumping its bond holdings and moving away from the dollar.

For those jumping to that conclusion, they did not take the time to ask the right question:“Where did the custody shift to?”That question matters for investors because it changes the risk assessment. If China were liquidating, you would expect pressure across Treasury auctions, persistent stress on dealer balance sheets, and visible strain in dollar funding markets. While those episodes occur from time to time, often tied to Fed policy or risk shocks, there is no clear connection to the“China dumping”storyline.

A better way to approach the claim is to follow the settlement trail, which takes us to the Belgium and Luxembourg connection.

Source: ZeroHedge News