On June 18th local time, the U.S. Department of the Treasury released the latest report on international capital flows for April (TIC).

The report shows that China's holdings of U.S. Treasury bonds in the month were $770.7 billion, an increase of $3.3 billion from the previous month.

After three consecutive months of reduction, it marked the first slight increase in 2024.

Many are puzzled, given the current aggressive stance of the United States, why increase holdings of U.S. debt?

What would be the result if all U.S. debt were liquidated?

Although the holding of over $770 billion allows China to continue to be the second-largest foreign holder of U.S. Treasury bonds, the scale has significantly decreased compared to previous years.

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In August 2002, China's holdings of U.S. debt first broke through the $100 billion mark, and in April 2008, it broke through the $500 billion mark.

After the global financial tsunami, China significantly increased its holdings of U.S. debt, breaking through the trillion-dollar mark in June 2010, and in November 2013, China's holdings of U.S. debt reached a historical record of $1,316.7 billion.

Since then, China's holdings of U.S. debt have peaked and declined year by year.

In June 2019, it was surpassed by Japan, and in April 2022, it fell below the trillion-dollar mark.

As of April 2024, China holds $770.7 billion in U.S. debt, with a cumulative net reduction of $546 billion over 11 years, a decrease of 41.47%.

Overall, the People's Bank of China holding U.S. Treasury bonds is a means of adjusting the scale of foreign exchange reserves, maintaining foreign exchange liquidity while also taking into account the preservation and appreciation of value.

Reducing or increasing holdings are normal business activities, and the current phase mainly involves a steady reduction by not renewing at maturity.

The first three months of this year saw consecutive reductions, with only a slight unexpected increase in April.

An increase in a single month does not mean a change in the overall trend.

If we sell all our U.S. debt, what would be the consequences?

Since it is a one-time liquidation of U.S. debt, the impact will inevitably be two-way.

Let's first look at the impact on the United States.

Changing the bondholder, paying interest on time, and redeeming at maturity remain unchanged.

U.S. Treasury bonds have the characteristics of fixed returns and promised redemption.

After the U.S. Treasury sells them, it only needs to pay interest on time and repay the principal at maturity.

Regardless of how the secondary market trades, the change of bondholder is just a transfer of debt rights and does not affect the debt.

At present, more than 75% of the U.S. debt balance comes from within the United States, with the Federal Reserve being the largest single holder, as well as other enterprises, financial institutions, and individuals purchasing them.

Especially since 2023, American families have become a new force in purchasing U.S. debt.

In other words, as long as U.S. debt does not default and the "borrowing new to repay old" operation can continue, the attractiveness of U.S. debt will continue to exist.

The more than $700 billion of U.S. debt held by China can be absorbed by investors and can ultimately be underwritten by the Federal Reserve.

What impact would a one-time liquidation of U.S. debt have on China?

A large-scale sale would inevitably lead to substantial losses.

Commodity prices are affected by the relationship between supply and demand.

Selling a large amount of U.S. debt to the market in a short period of time, only prices lower than the market price will have an advantage.

Once the selling price is lower than the market price, the larger the scale of the sale, the lower the price will be suppressed.

As the sale continues, if the market forms a stampede effect, triggering a chain of sales, then the price of U.S. debt will be even lower, and our losses will expand again.

It can be seen that clearing U.S. debt in a short period of time is an irrational act that is not worth the candle and should be carried out gradually and steadily.

The U.S. debt held by China is wealth accumulated over decades, and it is almost impossible to deal with it in one fell swoop, which is also not in line with market laws.

Careful observation can find that China ushered in an explosive period of purchasing U.S. debt from 2008 to 2013, increasing by more than $800 billion in five years, and the central bank holding U.S. debt is mainly dominated by medium and long-term U.S. debt with a term of 10 years.

Therefore, after 2019, China's holdings of U.S. debt began to decline rapidly.

In 2023, it entered an acceleration period, and it is a basic operation to continue to decline for several months.

This is because we have adopted a strategy of not renewing at maturity to reduce U.S. debt, which has ensured the principal and earned interest.

The total amount of U.S. Treasury bonds has exceeded $34 trillion, and the uncertainty of U.S. debt in the future has increased significantly, and the risk of default is accumulating.

Increasing the intensity of reducing U.S. debt is a prudent strategy to be prepared for a rainy day and to avoid risks.

Adjusting the structure of foreign exchange reserve assets, optimizing asset allocation, and increasing gold reserves are medium and long-term goals.

It can be foreseen that China's holdings of U.S. debt still have room for reduction, and reduction is the general trend.