Are We Starting to See the End of the Great Chinese Purchase of US Treasury Securities?

FT reports:

Three big and inter-related changes are under way. China’s appetite for US Treasury bonds, a cornerstone of the global economy for more than a decade, is waning. Beijing is ramping up its overseas development agenda to boost financial returns and serve key geopolitical interests. The promotion of the renminbi as an international currency is gradually liberating Beijing from the dollar zone, providing it with more latitude to open up to foreign portfolio investment flows.

The reorientation of China’s strategy away from Treasuries is a slow-running trend but one which intensified last month after Li Keqiang, the premier, announced a 10-point plan for financial reform. One of the points dealt with the deployment of China’s $3.9tn in foreign currency reserves, chunks of which have been recycled into Treasuries for more than a decade, helping to keep US interest rates low and underpin economic growth in the west. However, the new plan says: “Better use should be made of China’s foreign exchange reserves to support the domestic economy and the development of an overseas market for Chinese high-end equipment and goods.”...

Not only is China’s desire to buy US debt diminishing, so is its ability to do so. The banner years of Treasury bond purchases, during which holdings rose 21-fold over a 13-year period to hit $1.27tn by the end of 2013, were driven by an imperative to recycle China’s soaring US dollar current account surpluses.

But these surpluses are narrowing sharply — from the equivalent of 10.3 per cent of gross domestic product at the peak in 2007 to 2.0 per cent in 2013. In fact, if financial flows are taken into account, China ceased over the most recent four quarters to be a net exporter of capital at all.

The impact on Treasury purchases is evident in the tapering of Chinese buying over the past three years. But analysts see structural forces driving a steeper downturn in the future...

An older, but perhaps more important element, is the promotion of the renminbi as an international currency. The drive to internationalise it is derived from a desire to carve out China’s own space within a US-dominated global financial system.