In May, Chinese investors made headlines by selling a record amount of US stocks and bonds, totaling $42.6 billion in long-term securities. This trend continued into the first five months of the year, reaching an all-time high of $79.7 billion. So, what factors are driving this shift in investment strategy?
According to Billy Leung, an investment strategist at Global X Management Co. in Sydney, Chinese investors may be selling American securities as a risk reduction strategy amidst uncertainty surrounding the US presidential election. Additionally, there could be political motives at play, with a possible influence to reduce US dollar holdings.
The majority of sales were in Treasuries, followed by agency debt and stocks. The yield on the benchmark Treasury 10-year note also saw an increase, reaching the highest level since November on April 25th.
As one of the largest foreign holders of Treasuries, China’s investment decisions are closely monitored by bond investors and geopolitical strategists. The rise in tensions between the US and China has led to speculation that Beijing may shift its foreign reserves out of US assets, potentially affecting yields.
Wei Liang Chang, a macro strategist at DBS Bank Ltd., suggests that Chinese investors have good reasons to diversify away from US assets due to factors such as an over-valued US dollar, expensive US equity valuations compared to Chinese equities, and an increased need for liquidity during deleveraging.
Despite the data showing a decrease in China’s holdings of Treasury notes and bonds since 2017, there has been an increase in securities held in Belgium, a known location for custodial accounts for the Asian nation. This suggests that China may be reshuffling its dollar assets rather than completely cutting them.
Looking ahead, Ken Wong, an Asian equity portfolio specialist at Eastspring Investments Hong Kong Ltd., believes that the potential for Federal Reserve policy easing and a weaker greenback could deter Chinese investors from holding excessive dollar assets. A weaker dollar could make local securities more appealing for investment.
The ongoing geopolitical tensions between the US and China, combined with economic and political uncertainties, will continue to shape Chinese investment decisions in the US market. Stay informed on the latest developments in global finance by following Extreme Investor Network.