China: Foreign Bond Purchases

Published on October 30, 2017

China’s third quarter FX reserve holdings of foreign government bonds from major countries increased by $34.6 billion, or just over 2%, over the second quarter of 2017, from $1.601 to $1.635 trillion. That represents a 4% growth rate year over year, from $1.568 trillion in Q3 of 2016 to $1.635.

*** The PBoC’s Q3 figures represent the third consecutive quarterly increase in China’s FX reserve holdings of foreign government bonds, after 13 consecutive quarters of net declines. The $34.6 billion net quarterly increase includes $18.8 billion in US Treasury holdings, $6.5 billion in European government bonds, and $10.6 in government bonds from the BRICS plus South Korea, Australia, Canada, and Singapore. China’s holdings of Japanese government bonds declined by $1.2 billion over the same period. ***

*** Senior Chinese sources indicate that the country will continue to try and diversify its reserves by adding non-dollar assets to its portfolio, as well as through greater direct non-US investments overseas. The PBoC, however, does not intend to engage in any large-scale sales of US Treasury bonds. Securities holdings are expected to increase – albeit at a slightly slower pace – by $15-20 billion in Q4 of 2017. ***

Last year, China was a net seller of $192 billion of US bonds, according to the PBoC (US Treasury puts that figure at $188 billion).

US, European, and BRIC Purchases

According to the PBoC, China’s total holdings of US securities increased by $54.4 billion in the third quarter this year from $1.139 trillion on June 30 to $1.194 trillion on September 30. The quarterly increase breaks down as $20.6 billion in July, $19.5 in August, and $14.3 in September – positive, but slowly decelerating.

The bulk of the stock of $1.139 trillion US securities holdings, about 83%, is held in FX reserves, while 17% is held by other state-owned financial institutions.

The $439 billion total stock of European government bond holdings is comprised 75% of Eurozone bonds, and 25% from non-Eurozone countries. The $6.4 increase over Q3 in PBoC holdings results from a net increase of $7.0 billion in the value of Eurozone bond holdings, and a net decrease in value of $0.6 in non-Eurozone European government bonds, mainly UK gilts.

Among the BRICs, the net Q3 increases in the PBoC’s holdings of $1.8 billion of Russian government bonds and $0.5 of Brazilian bonds were in part due to some appreciation of the Ruble and Real against the US Dollar over the period (by comparison, holdings of Russian bonds decreased by $3 billion over the course of 2016). And finally, Indian government bond holdings, despite a drop in the INR over the period, increased by around $0.3 in Q3.

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