China's holdings of U.S. debt at 12-year low

Experts said on Tuesday that Chinese investors' holdings of U.S. Treasuries reaching a 12-year low will help China reduce market losses resulting from monetary tightening in the United States and optimize the country's international asset allocation.

China, the second-biggest foreign holder of U.S. debt, had trimmed its holdings of U.S. Treasuries for seven consecutive months to $967.8 billion by the end of June, down from $980.8 billion a month earlier, according to U.S. Treasury Department data.

China's holdings of U.S. debt reached a 12-year low in June, after dropping below the $1 trillion mark in May.

Meanwhile, the total foreign holdings of U.S. Treasuries stood at $7.43 trillion by the end of June, up $5.1 billion from May but down $88.1 billion year-on-year, according to the U.S. Treasury Department.

Japan, the leading holder of U.S. debt, reduced its holdings by $67.7 billion since the beginning of the year to $1.236 trillion by the end of June.

Experts attributed the waning attraction of U.S. Treasury bonds to interest rate hikes, high inflation and the weakening economic outlook in the U.S., all of which have combined to impair the prospects of returns on this form of investment.

"Market participants' long-term views on U.S. Treasuries have turned more bearish, leading to a decline in demand for U.S. debt in a number of countries, including China," said Ye Yindan, a researcher at the Bank of China Research Institute.

The U.S. Federal Reserve's ongoing interest rate hikes could deflate the value of investors' U.S. debt holdings and increase downward pressures on the U.S. economy, Ye said, adding that the risks holders of U.S. debt face have intensified as the U.S. national debt has increased to a record high.

With the Fed raising interest rates by 225 basis points this year to tame U.S. inflation, which is hovering around a 40-year high, the yield on 10-year U.S. Treasury bonds increased to 2.79 percent as of Monday, up from 1.52 percent at the end of last year, according to market tracker Wind Info.

As bond prices move in the opposite direction of yields, this process has lowered bond prices, which would inflict losses on investors who sell the bonds ahead of their maturity, experts said.

On top of decreasing bond prices, elevated inflation in the U.S. has offset the seemingly high nominal yields on U.S. Treasuries, said Yang Jinghao, chief economist at Concat Data Technology (Hangzhou) Co Ltd.

Apart from China shunning potential market losses, Ye from the Bank of China Research Institute said the country's pared U.S. debt holdings will also help diversify and optimize its overseas asset allocation.

The Fed's rate hikes sent the dollar index to about 106.8 on Tuesday, an increase of more than 11 percent since the beginning of the year, according to Wind Info.

Liu Chunsheng, an associate professor at Central University of Finance and Economics, said China's U.S. Treasury bond holdings may further decline amid the Fed's tightening cycle.

But the decline may gradually decelerate, given the status of U.S. Treasuries as a critical international reserve asset. "Unless very extreme circumstances arise, it is unrealistic for China to slash all of its U.S. debt holdings."