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China rebuffs report it plans to halt USA treasury purchases

14 January 2018

"Consequently, some future selling of US treasuries may be forthcoming by market participants, including from China, as well as elsewhere, because of inflation pressures", say Grace and Haddad.

China's foreign exchange reserves, the world's largest, rose US$129.4 billion in 2017 to US$3.14 trillion, as tight regulations and a strong yuan continued to discourage capital outflows, data from China's central bank showed.

"We are far more inclined to see a move by SAFE, if confirmed, as a conventional investment decision", Eurasia Group said. They also said that trade tensions with the United States were another reason to slow Treasury purchases, though they did not specify precisely why this was the case.

"Gold traders confirm that it was because the Government announced in advance that it was planning to sell such a large quantity of gold that the markets became depressed", The Telegraph reported then-shadow secretary to the Treasury Philip Hammond as saying in 2009.

Any reduction in Chinese purchases would come just as the U.S. prepares to boost its supply of debt. "But that correlation has broken apart fantastically over the last couple of days", he said. "I don't think that's worked out so poorly for the U.S".

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The US administration is considering several new tariffs in the coming weeks, including broad restrictions on steel and aluminium imports and punitive actions against China arising from an investigation into Beijing's intellectual property practice.

The country is also the biggest foreign holder of U.S. government debt, with US$1.19 trillion in Treasuries as of October 2017, according to data from the Treasury Department.

China already holds a huge amount of USA government debt.

ANALYST'S TAKE: "Justifiably, Beijing's biggest worry is that the value of its USA bond holdings will be eroded substantially by rising inflation and supply", analysts from Mizuho Bank Ltd. said in a daily commentary.

The stakes may be higher now as tensions with the US have been building since the election of President Donald Trump, who's been critical of the American trade deficit with China and other countries.

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The response fell short of a full-throated denial, and didn't push U.S. Treasury prices higher.

Australian 10-year bonds rose 2.1 points to 2.74 per cent.

In the eyes of some, Chinese officials may be trying to send a message that they have leverage with President Trump talking tough on trade. On Wednesday, the yield was trading around the highest level since March previous year.

But any attempts to use that power could hurt the dollar, damaging China's own U.S. holdings.

Following the market's movement, bond veteran Gross, who is portfolio manager of the Janus Henderson Global Unconstrained Bond and Total Return strategies and a member of the global macro fixed income leadership team, took to Twitter on Tuesday to say "bond bear market confirmed".

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China rebuffs report it plans to halt USA treasury purchases