Over the past decade, China, the world’s second-largest economy, has been systematically divesting itself of US government-backed securities, amounting to hundreds of billions of dollars. The latest data from the U.S. Treasury Department reveals that China’s US Treasury Holdings have reached a 14-year low.
China’s Decade-Long Divestment
China had been consistently accumulating US Treasury securities until May 2013, when its holdings peaked at an unprecedented $1.297 trillion. However, since then, the BRICS nation has been steadily reducing its Treasury holdings. As of August 2023, China’s holdings have been whittled down to $805.4 billion, marking a decrease of over $491 billion from the peak.
The Implications of China’s Actions
The gradual distribution of China’s Treasury holdings coincides with a major rating agency’s downgrade of the United States’ debt outlook. Moody’s, a leading credit rating agency, recently changed its outlook on the US credit rating from stable to negative. This shift is attributed to the country’s deteriorating financial position and ongoing political discord in Washington.
Moody’s expressed concerns over the US’ large fiscal deficits in the context of rising interest rates, without effective fiscal measures to curb government spending or boost revenues. This situation, according to Moody’s, significantly weakens debt affordability. While the downgrade in outlook doesn’t necessarily imply an imminent cut in the country’s credit ratings, Moody’s indicates that the probability of such an event has increased.
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