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‘What Is Behind the 40% Drop in China’s U.S. Treasury Holding’

That is the suggestive headline that Nikkei placed on an article published by the wire service a month ago. The Nov. 4 article reported that China is being subjected to speculators’ capital flight in the form of a carry trade, and that the government is reducing its exposure to Treasuries as part of “Beijing’s strong determination to defend its own currency.”

There may be more going on, however, than Nikkei is prepared to write about.

China’s August 2023 holdings of Treasuries hit $805 billion, down from some $1.3 trillion in 2016. Nikkei wrote: “Many analysts focus on the decline in the country’s Treasury balance as a sign of Beijing’s strong determination to defend its own currency.… China is facing serious capital flight caused by rising concern about its economic growth and debt burden (sic). In September, capital outflows reached $75 billion, the biggest such monthly amount since 2016, according to an estimate by Goldman Sachs…. Taking advantage of the country’s lower interest rates spurred by monetary easing, some speculators engage in carry trade by borrowing in yuan and converting the money into currencies with higher interest rates. Goldman Sachs has proposed clients use borrowed yuan to fund bets on higher-yielding currencies like the Brazilian real and other South American money. As speculators seek profits by selling the yuan to buy other currencies, an increase in carry trade could further weaken the Chinese currency.

“Many analysts expect that if such speculative trading increases, Chinese authorities will have no choice but to step in to bolster the yuan—possibly by unloading Treasuries.”