China, the biggest foreign holder of US Treasuries, is tipped to further reduce its investments in US government bonds after the election of Donald Trump.
Analysts expect the value of the bonds to fall after a Trump administration embarks on a round of tax cuts and massive spending on infrastructure projects.
Beijing has already slashed its holdings of US treasury bills for four months in a row.
A high yield on a bond generally results in a lower price and the yields on the US investments are likely
to rise under Trump’s presidency, according to Huang Haizhou, a managing director at China International Capital Corp.
The yield of benchmark 10-year Treasury bills has risen over two per cent since Trump won the US presidential election, but it is still at a very low level “compared to 16 per cent in 1981”, Huang told a conference in Beijing on Thursday.
Huang’s comments came after the Chinese government holdings in treasuries fell US$28.1 billion in September, according to official US data.
China now owns 1.16 trillion yuan (HK$1.3 trillion) of US treasury bills, the largest foreign holder of the assets but at its lowest level in four years. They amount to about 37 per cent of China’s total foreign exchange reserves, according to US data.
China’s real holding of US government bonds may be higher because the State Administration of Foreign Exchange also makes investments through proxy accounts. China never releases details of the composition of its reserves, guarding it as a state secret.
As capital is leaving China as the nation’s currency weakens against the dollar, the central bank is selling greenbacks to stabilise the exchange rate. It means the funds available to invest in US Treasuries have fallen.
Li Daokui, a former member of the Chinese central bank’s monetary policy committee, estimated that the yuan may fall in value against the US dollar by another three to five per cent yuan next year.
The yuan has already weakened to an eight-year low against the greenback.
The expectation that China’s currency will fall further in value is likely to spur a further flow of cash out of the country.
Zhao Ju, executive vice-president at China Merchants Bank, said at the same forum that private companies, rather than state-owned enterprises, were targeting luxury hotels, landmark buildings and stakes in firms as part of their investment strategy overseas.
Some Chinese families were also considering increasing their holdings in foreign assets as the yuan weakens, particular denominated in US dollars, but “property still accounts for a majority of individual Chinese overseas investment”, said Zhao.
The US economy, estimated to register a growth of two to 2.5 per cent this year, may be given a further boost in 2017 amid expectations that the Trump administration will announce a massive infrastructure investment programme.
Meanwhile, the US Federal Reserve is widely expected to increase interest rates in December, especially after its chairwoman Janet Yellen told Congress on Thursday that an increase could be “appropriate relatively soon”. The pace of further hikes could also rise in the coming years if the economy stays strong.
More investors are also likely to move cash to the US from emerging markets and the Eurozone which is troubled by negative interest rate policy.