(Bloomberg) — Chinese investors sold a record amount of U.S. stocks and bonds in May as diplomatic tensions between the world’s two largest economies rose.
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According to the latest data released by the U.S. Treasury Department on Thursday, funds in the Asian country sold $42.6 billion worth of long-term securities consisting of Treasuries, agencies, corporate and other bonds as well as stocks. Total sales in the first five months of this year reached $79.7 billion, the highest level on record for the January-May period.
Billy Leung, an investment strategist at Global X Management in Sydney, said Chinese investors may have sold U.S. securities to reduce risk due to uncertainty surrounding the U.S. presidential election. He added that there was a “potential political impact of reducing U.S. dollar holdings.”
More than half of the sales were in Treasuries, followed by agency debt and stocks. The yield on the benchmark 10-year Treasury note rose to its highest level since November on April 25.
China is one of the world’s largest foreign holders of Treasury securities, and its flows are closely watched by bond investors and geopolitical strategists alike. Rising Sino-American tensions have often fueled speculation that Beijing may shift its foreign reserves away from US assets – a move that would likely add upward pressure to yields.
“Chinese investors have good reasons to diversify away from US assets given the strong US dollar, the higher value of US stocks relative to Chinese stocks, and the growing need for liquidity due to deleveraging,” said Wei Liang Zhang, a strategist at DBS Bank Ltd. “The divestment trend may continue based on economic fundamentals, as well as political uncertainty in the US election.”
The U.S. government data has its own flaws: U.S. securities held in a custodial account in a third country do not appear as Chinese securities.
China’s holdings of Treasuries and bonds have fallen by $440 billion since the end of 2017. During that period, the stock of securities held in Belgium, widely seen as home to the Asian nation’s custodial accounts, has increased by $159 billion. China’s holdings of U.S. stocks, agency bonds and other debt have also risen, suggesting the nation may have been shuffling its dollar assets rather than reducing them.
However, the prospect of a easing of the US Federal Reserve and any weakness in the US currency could discourage Chinese investors from holding too many dollar assets, said Ken Wong, an Asian equity portfolio specialist at Eastspring Investments Hong Kong Ltd.
He added that the weaker dollar could make investing in local securities “more attractive.”
(Adds strategic comment)
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