On Tuesday (December 19) local time, the U.S. Department of the Treasury released the International Capital Flows Report (TIC) for October 2023. The report shows that the scale of U.S. Treasury bonds held by foreign investors fell for the second consecutive month in October. China has reduced its holdings of U.S. debt for the seventh consecutive month, and its holdings have dropped by nearly $100 billion during the year.

The report shows that China’s holdings of U.S. Treasury bonds fell by US$8.5 billion in October from the previous month, marking the seventh consecutive month of reduction. The total holdings dropped from US$778.1 billion in September to US$769.6 billion, continuing to hit a new low since 2009.

Since April last year, China’s U.S. debt holdings have been below $1 trillion, andCompared with the size of its holdings at the end of last year ($867.1 billion), China's U.S. Treasury bond holdings during the year have dropped by nearly $100 billion.

It is worth mentioning thatThis is also the second wave of "seven consecutive declines" in China's U.S. bond holdings in just 15 months. As of February this year, China had reduced its holdings of U.S. debt for seven consecutive months, with its total holdings hitting record lows since May 2010. Although China once increased its holdings of U.S. debt in March, in hindsight this was obviously just an "episode" in the overall reduction process, because since then China has quickly launched a new round of reductions in U.S. debt holdings.

In terms of other U.S. overseas "creditors," Japan remained the largest overseas holder of U.S. Treasury bonds in October. Japan's holdings of U.S. Treasury bonds that month were $1.0982 trillion, an increase of $11.8 billion from September, temporarily halting the previous three consecutive months of reducing holdings of U.S. debt. In September, Japan set a record for the largest single-month reduction in U.S. debt holdings since April.

Overall, among the top ten overseas "creditors" of the United States, four countries reduced their holdings in October and six countries increased their holdings. The underweight camp includes China, Luxembourg, Belgium and Switzerland; the overweight camp includes Japan, the United Kingdom, the Cayman Islands, Ireland, Canada and France.


If all overseas "creditors" are included, the total size of U.S. Treasury bonds held by foreign investors in October fell to $7.565 trillion from $7.604 trillion last month, marking the second consecutive month of reductions.

The benchmark 10-year U.S. Treasury bond yield reached a 16-year high of 5.021% on October 23, mainly affected by concerns about an increase in the supply of U.S. bonds and expectations that the Federal Reserve will maintain high interest rates for a long time. However, the situation has since reversed, with the 10-year U.S. Treasury yield as recently as this week falling to 3.924%, as investors bet that falling inflation will lead the Federal Reserve to cut interest rates sooner than previously expected.

Yu Yongding: It is necessary for China to reduce its holdings of U.S. Treasury bonds in an orderly manner

On December 17, Yu Yongding, a member of the Chinese Academy of Social Sciences, said at the 2023 Sanya Financial International Forum that according to estimates, the ratio of U.S. national debt to GDP will continue to rise, which means that over time, the U.S. overseas net debt will continue to worsen. At the same time, the Federal Reserve's continued interest rate hikes may also accelerate the deterioration of the United States' net overseas debt. Given the low coupon rates on U.S. Treasury securities and given the consequences of the dramatic expansion of U.S. net foreign debt,It is necessary for China to reduce its holdings of U.S. Treasury bonds in an orderly manner.

Yu Yongding believes that,China should step up its efforts to adjust the structure of its overseas assets and liabilities and increase its income from overseas net assets. First, reducing the proportion of foreign exchange reserves in overseas assets does not mean selling off U.S. Treasury bonds, but reducing U.S. Treasury holdings in an orderly manner. Second, improve the safety of China’s overseas assets, especially foreign exchange reserves. Under the current conditions, China should try its best to reduce its foreign exchange reserve stock to the internationally recognized foreign exchange reserve adequacy rate level.

Yu Yongding emphasized that China should maintain a balance in foreign trade as much as possible and keep imports and exports roughly in balance. "We can have a trade deficit for a certain period of time, but China's economic growth cannot rely too much on external demand. We should achieve a change in the way of economic growth, that is, 'dual circulation with internal circulation as the main focus.' To do this, we must maintain a high growth rate in China's economy, which requires us to adopt an expansionary monetary policy, which will help maintain the safety of our country's foreign reserves and the safety of overseas assets."

Yu Yongding said that the fundamental way to optimize the overseas investment position structure and the balance of payments structure lies in the implementation of the development strategy of "dual circulation, with internal circulation as the main focus". Stimulating economic growth and increasing imports through expansionary fiscal and monetary policies will help achieve balance of international payments and optimize the structure of overseas investment positions.

Other highlights from the TIC report

The International Capital Flows Report (TIC) released by the U.S. Department of the Treasury also showed that all foreign countries had a net outflow of US$83.8 billion in U.S. long-term and short-term securities and bank flows in October, showing net outflows for the second consecutive month. Among them, the net outflow of foreign private funds was US$68.4 billion, and the net outflow of foreign official funds was US$15.4 billion.

In October, foreign residents reduced their holdings of long-term U.S. securities - with net sales of $15.6 billion. Among them, net purchases by foreign private investors were US$8.5 billion, while net sales by foreign official institutions were US$24.1 billion. U.S. residents reduced their holdings of long-term foreign securities, with net sales of $18.9 billion.

If both international long-term securities and U.S. long-term securities are taken into account, overseas net purchases of U.S. long-term securities in October were 3.3 billion.

Foreign residents reduced their holdings of U.S. Treasury securities by $25.5 billion in October, and foreign residents' holdings of short-term U.S. dollar-denominated securities and other custody liabilities fell by $72.8 billion. The U.S. banking system's own net dollar-denominated liabilities to foreign residents fell by $14.3 billion.