China Unloads $22 Billion in U.S. Treasurys

(Beijing) — China sold $22 billion in U.S. Treasurys in July, and its holdings of U.S. government debt fell to the lowest level in more than three years, according to U.S. government data — a sign that the mainland needs the investment funds, analysts said Sunday.

By the end of July, China's U.S. Treasury reserves fell to $1.22 trillion, the latest data issued by U.S. Treasury Department on Friday showed. Reserves have fallen about 7.6 percent since November 2013 when China held $1.32 trillion in U.S. Treasurys.

In contrast to China, the portfolio of Japan, the second-largest holder of U.S. Treasury securities, increased to $1.15 trillion after it purchased $6.9 billion worth of U.S. government Treasurys in July, according to the same data release.

China's selling of U.S. government bonds comes as the country tries to prop up the yuan to arrest capital flight. The yuan is under pressure of further devaluation with the expectation that the U.S. Federal Reserve may raise interest rates soon.

Since the majority of China's foreign exchange reserves are held in U.S. dollars, the selling of reserves is also seen as a way to diversify its holdings.

But there is perhaps a more-important explanation, said Tan Yaling, president of China Forex Investment Research Institute, a think tank that focuses on foreign exchange.

Selling U.S. Treasurys can generate fresh capital for several economic projects that China has initiated, such the Asian Infrastructure Investment Bank and the Belt and Road Initiative. The Belt and Road Initiative in particular aims to redirect the country's capacity and capital for regional infrastructure development to improve trade with countries in Southeast and Central Asia and with Europe, Tan said.

Ding Jianping, finance professor at Shanghai University of Finance and Economics, said, "The effect of supporting the value of yuan by selling the U.S. government debts would only be temporary. A more-sensible explanation for a series of selling is that China is in dire need of more capital to diversify and upgrade its industrial structure."

Contact the reporter, Dong Tongjian, at (tongjiandong@caixin.com), and the editor, Ken Howe, at (kennethhowe@caixin.com)