China needs to further reduce its government bond holdings, partly to reduce Washington’s potential influence over its Asian rival, according to a paper published by a Chinese state think tank.
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(Bloomberg) — China needs to further reduce its holdings of government bonds, partly to reduce Washington’s potential influence over its Asian rival, according to a paper published by a Chinese state think tank.
The vast American assets held by Chinese authorities “are increasingly becoming hostages – preventing us from protecting our national sovereignty,” wrote Di Dongsheng, vice dean of Renmin University’s School of International Studies, in an article published by was published in a China Institutes of Contemporary International Relations diary. Di also noted President Xi Jinping’s emphasis on maintaining “territorial integrity amid changes not seen in 100 years” in the global context.
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Di noted that the U.S. freeze on Russian assets following Moscow’s all-out invasion of Ukraine in 2022 was part of a long series of American actions that created challenges for foreign investors. He cited the U.S. seizure of German property during World War I, as well as the treatment of Japanese assets during World War II and the large-scale incarceration of Japanese Americans as evidence that “the U.S. commitment to respecting property rights and protecting human rights merely proof of this is “myth.”
While U.S. Treasury bonds now earn significantly higher yields than their Chinese counterparts, Di also argued that “U.S. Treasury yields have been low for a long time” and that the returns that China earns are lower than those that American investors earn in China receive.
China’s holdings of government bonds have been trending downward for several years, reaching their lowest level since 2009 last October. The country remains the second-largest foreign holder of government bonds after Japan.
Yuan’s strength
Many emerging countries increased their holdings of government bonds as protection in the event of global financial turmoil. China also bought up the securities for years while buying dollars to keep its exchange rate low – a tactic that critics say was aimed at protecting the competitiveness of Chinese exports.
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Di argued that thanks to structural economic reforms at home, China no longer needs to hold massive foreign exchange reserves.
“Increased exchange rate volatility or moderate overvaluation of the yuan will not have a major impact on China’s exports,” Di wrote. Low-end Chinese manufacturing has been replaced by mid- to high-end products such as electric vehicles, batteries, drones and new energy products less sensitive to exchange rate levels, he said.
Di also considered large dollar reserves unnecessary in case the U.S. currency pressures to appreciate against the Chinese yuan. “China’s strong export competitiveness means the exchange rate will soon rise automatically,” he wrote.
Di’s comments drew global attention in 2020 when Fox News quoted a speech of his at the time in which he alleged Chinese influence on then-President-elect Joe Biden. His speech was later removed from China’s social media platforms.
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