Numerous articles and Tweets have surfaced about China dumping Treasuries. First let’s investigate the rumors. Then let’s look at conditions in which China might dump dollar assets.Not China DumpingUntil the past week there was a relentless selloff in US treasuries that sent bond yields soaring.Rumors and articles surfaced that China dumping Treasuries was the reason.I discussed the situation on October 4 in Bond Bulls are Getting Crushed in a Relentless Selloff, It’s Not ChinaHas China sold any US treasuries? Likely not. Much of what China holds is hidden in State Owned Enterprises and custodied Treasuries.

No Net SalesAs I read the chart, there is no net sales since mid-2020 and only small, brief sales all the way back to 2018 with net accumulation since then.Has the China Bid Stopped?

“Has the Chinese bid for Treasuries stopped? No. But China has shifted toward Agencies and holds more of its Treasuries in offshore custodians. This should be the definitive flow chart –not a chart change the valuation of US custodied Treasuries!“That should have settled the matter. Unfortunately it didn’t. People kept posting the chart in Setser’s first tweet as if it represented the state of affairs.Now that we have addressed the myth that China is dumping Treasuries, let’s address the fundamental conditions on why China might do so.Under What Conditions Would China Dump US Treasuries and Agencies?To understand when that might happen, lets step back further and ask “Why does China accumulate US assets in the first place?”The answer is China runs a persistent balance of trade surplus with the US and most of the world in general. By default it accumulates foreign reserves, mostly held in US assets, Treasuries and Agencies, because those are the most liquid assets in the whole world.If ever the US started exporting massive goods and services to China above and beyond what the US imports from China then the current conditions would reverse.Capital Controls and Yuan FlightChina and Japan have both sold US dollars (yuan and yen respectively) to shore up their currencies hoping to stop capital flight.As Japan shows, this tactic never works except in the short term. Japan has recently been forced to let bond yields rise.In this respect, dumping dollars to shore up yuan or yen is an act of weakness, not strength.Two Possible Conditions for Dumping

What about War?The US would likely freeze China’s assets just as it did with Russia, weaponizing the US dollar.The BRICS nations would like a way around dollar weaponization but it is far easier said than done for numerous reasons.What Does China Do With a Dollar That’s No Longer Risk Free? Buy Gold?On March 18, 2022, I asked What Does China Do With a Dollar That’s No Longer Risk Free? Buy Gold?That led to a Q&A with Michael Pettis.Q&A With Michael PettisMish: Will China now hold more commodities and fewer dollars despite the pro-cyclical nature of it? More Euros or Yen over dollars? More gold?Michael Pettis:

Unprecedented Fed Action May Have Just Started a Global Currency CrisisI discussed the loss of risk-free status in Unprecedented Fed Action May Have Just Started a Global Currency Crisis

In one quick order, the Fed electronically rendered Russia’s foreign dollar reserves worthless, or at least unusable for now.

Now, if you were in China’s shoes do you hold dollars or gold as reserves? What about metals?

We are not at a full blown crisis stage yet. And perhaps we do not get there this time.

But when trade wars like these start, history suggests major wars often follow.

What About the Dollar as Reserve Currency?Someone must hold every dollar, every bond, every US treasury 100% of the time.Oil priced in euros does not change that statement. That countries hold dollars, not euros, has everything to do with reserve math and nothing to do with perceived pricing units.The Yuan Will Not Replace the US Dollar, Nor Will It Be Backed by CommoditiesDon’t confuse a diminishing role for the US dollar with it’s demise as the global reserve currency.It’s far too early for that. For further discussion, please see the above link.What’s Next?There is still no good way around holding US dollars. And even if there was, consider the Pettis comment “But, as you know, the hard part of reducing the US dollar component of your reserves is figuring out what the alternative should be.”Dear delusional Bitcoin advocates, it will not be Bitcoin either. No major country will turn over currency trading to an algorithm. This especially applies to China because China has cracked down on Bitcoin because it is used in capital flight.Meanwhile, please note the yuan does not even float and China has no bond market to speak of.So unless you think the US will suddenly start exporting massive amounts of goods and services to China (or the yuan collapses and China “dumps” dollars for yuan), reports of China dumping will be false.More By This Author:Job Growth Slows To 150,000 Employment Drops By 348,000
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