4 reasons China and other foreign investors may retreat from the U.S.
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Another day, another sign that foreign investors may be tiptoeing away from the U.S.: This time, it's a report that China is telling its banks to cut back on buying U.S. Treasury securities.
Why it matters: Such a retreat would rhyme with a growing concern that the dollar — and America — is losing its status as the safest place in the world to park your money.
- Longer term, that would make it more costly for everyone in the country to borrow money — from people looking for mortgages, to the federal government trying to fund tax cuts or keep Social Security solvent.
- But for the moment, it's a worry, not a reality. The move away from dollar-denominated assets is a "multi-year trend," RSM chief economist Joe Brusuelas tells Axios.
- And there are reasons to believe China's latest move is being misinterpreted.
Where it stands: Bloomberg, citing people familiar with the matter, reported Monday that China is telling its banks to limit holdings of U.S. Treasury bonds to diversify their risks.
- The directive does not apply to China's official state holdings — which are huge — and while there was a market reaction, it was relatively small. Treasury yields rose very slightly, and the dollar weakened a smidge on the news.
By the numbers: China is the third-largest buyer of U.S. Treasuries — the country held $683 billion at the end of last November, down from $769 billion the year before, per federal data.
- Japan is the top buyer, with $1.2 trillion.
- Foreign investors hold 30% of U.S. debt overall.
Follow the money: Already this year, the value of the dollar against other currencies has fallen.
A few critical trends are colliding:
1. President Trump. Tariffs, big policy shifts and concerns that the Federal Reserve is being politicized make investors wary of buying Treasuries (effectively lending the U.S. money).
- Plus, some countries are starting to invest more domestically, spending on their own militaries as concerns grow over longstanding relationships and security agreements with the U.S.
- Investors are increasingly worried that the White House would use Treasuries as a weapon or source of leverage with other countries, Brusuelas says.
2. Rising deficits. There are some signs that investors are growing wary of the U.S.' long-term fiscal outlook, as Axios' Neil Irwin recently reported.
3. Weaponization of the dollar. Presidents of both parties have used the dollar more aggressively as a tool of statecraft in recent decades—perhaps most vehemently in 2022, when the U.S. and its allies froze Russia's foreign exchange reserves.
4. Japan. For the first time in decades, yields on Japanese bonds are rising.
- That's unraveling a backbone of the global markets—the yen carry trade, in which investors borrow in yen and invest in higher-yielding assets— and reducing the demand for dollars and Treasuries.
Between the lines: Even the slightest suggestion that China wants less exposure to Treasuries hits a raw nerve when there's growing debate over the safe-haven status of the dollar.
- But that's not quite what happened here, says Brad Setser, a senior fellow at the Council on Foreign Relations.
- In December and January, Chinese exporters sold their dollars to state-run banks — about $100 billion each month.
- The banks then poured that money into Treasuries, Setser says. (That data doesn't typically show up in the U.S. tracking.)
- What has happened since is the Chinese government is telling these financial institutions to diversify those investments a bit.
The bottom line: "The world cannot move away from the dollar," Setser says. Investors everywhere rely on it. If that were really happening we'd see much more extreme swings.
