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China stockpiles gold while letting US bond holdings slide

19 June 2019


China reduced its holdings of U.S. government debt again in April even as Beijing's gold reserves continued to grow, diversifying away from the dollar as ties with Washington fray.


The $7.5 billion dip on the month brought China's total Treasury stockpile to $1.11 trillion, down $90 billion from the most recent peak in August 2017. This follows a roughly $10 billion decline in March.


The downtrend in recent months parallels the escalation of the trade war between Beijing and Washington, even as the latest data precedes the breakdown in talks last month that led to another round of tariffs. A shrinking current-account surplus has left China with less wherewithal to buy Treasurys, and Beijing appears to have decided that overextending itself to do so is unnecessary given the souring bilateral relationship.


But few other options are available for stashing large amounts of capital, and selling off U.S. government debt too quickly would risk further antagonizing Washington. Such a move also would drive up long-term yields, reducing the value of China's remaining holdings.


Rather than dumping Treasurys as a way to gain leverage in trade negotiations, Beijing seems to be taking a subtler approach through trimming its holdings by $20 billion or less per month.


Some of this capital is going into gold. China's gold reserves have grown for six straight months since December, the first time the country increased its holdings of the precious metal in more than two years. Russia has made similar moves, slashing its dollar-denominated assets while purchasing gold as essentially a borderless currency.


China's Treasury stockpile long stayed above $1.2 trillion, but after the yuan's sharp depreciation in 2015, Beijing is believed to have sold some of the securities to fund intervention to shore up its currency.


The country's overall foreign-exchange reserves dropped below $3 trillion, though the bleeding was stemmed by controls aimed at curbing capital flight, including restrictions on overseas acquisitions. Chinese Treasury holdings bottomed out in January 2017 and returned to $1.2 trillion that August.

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