If China’s holdings are more stable than reported, one of the market’s recurring worries, a steady Chinese exit from Treasuries, would carry less weight, which could ease some concern about foreign demand at US debt auctions. The theory also shows why headline foreign holdings data can mislead traders who read monthly declines as outright selling. Watch auction metrics such as indirect bidder demand, a common proxy for foreign buyers, alongside the custody data, since a mismatch between the two would add weight to the theory. Any official denial or confirmation would be the main catalyst, and neither looks imminent.

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China’s Treasury holdings may not be shrinking at all, just changing address, and the clue is a $600 billion pile with Canada’s name on it.

Summary:

• Canada’s holdings of US debt securities have grown to nearly $600 billion of Treasuries and bonds despite a tariff war, Bloomberg reported
• DoubleLine’s Vitaliy Liberman flagged the rise and was told the growth was actually due to China
• China is said to be moving US securities to non-US custodian banks in other countries, masking its role in financing US deficits
• China’s reported Treasury holdings have fallen, but some investors and analysts believe it is shifting holdings rather than reducing them
• The claims are unconfirmed

Speculation is growing that China may be holding more US government debt than official figures show, after a sharp rise in Canada’s reported holdings of US securities drew attention from bond investors, Bloomberg reported.

According to the report, DoubleLine’s Vitaliy Liberman noticed that Canada’s stockpile of US debt securities had grown aggressively to nearly $600 billion of Treasuries and bonds, despite a tit-for-tat tariff war between the two countries. Liberman was told that the increase was in fact due to China, which has been moving US securities to custodian banks outside the United States. That would mask China’s true role in financing America’s budget deficits.

China’s reported ownership of US Treasuries has fallen. Some investors and analysts believe that decline reflects China shifting its holdings to accounts in other countries, rather than actually reducing them, in order to give the appearance of decoupling from the United States, Bloomberg said. The claims have not been confirmed, and the report summary did not cite official comment from Beijing or Ottawa.

The theory rests on how the data are compiled. US Treasury figures on foreign holdings generally record securities by the country where they are held in custody, not by the ultimate owner. Bonds owned by one country but kept with a bank or clearing house in another can therefore show up under the second country’s name. Analysts have long cautioned that this makes it hard to pin down any single country’s true position, particularly for large official holders.

The question matters because China has historically been one of the biggest foreign buyers of US government debt. A genuine Chinese retreat would remove an important source of demand for Treasuries at a time of heavy US borrowing, while hidden holdings would suggest that demand is more stable than the headline numbers imply. The appearance of decoupling would also carry political weight amid trade tensions.

Investors will be watching the next monthly releases of US Treasury data on foreign holdings for further unusual moves in custodial centres, and for any comment from Chinese or Canadian officials. Without confirmation, the figures point to a plausible explanation rather than an established fact. 

This article was written by Eamonn Sheridan at investinglive.com.

Source: Investing Live - News