Taps Coogan – October 4th, 2023

The following chart, from Apollo via The Kobeissi Letter, highlights the decline in China’s US Treasury holdings, which have now fallen by $300 billion since their high in 2011:

While China has been letting treasuries roll of its books for over a decade, the pace has picked up since the start of 2022.

That is driven by three things.

One, treasuries have been an awful investment over the last couple years. Long duration treasuries have not only seen their largest total return losses in American history, they’ve now matched the loss in the S&P 500 during the Global Financial Crisis on a mark-to-market basis.

Second, China’s treasuries holdings are a manifestation of their foreign currency reserves, which are in turn a function of their capital account, which has been running a deficit since 2020.

Third, US dollar sanctions, which have been expanded and deepened by every administration for decades, seems to have finally pushed many countries to re-evaluate how they choose to denominate their reserves.

Given all of that, one would expect China’s Treasury holdings to continue to drop to whether the absolute minimal level that is required to facilitate their capital controls regime and defend their currency peg.