China's sudden increase in holdings of U.S. Treasury bonds has left many people confused.

What's going on?

Wasn't there a plan to sell off U.S. debt?

The wisdom of the great power struggle is something many people haven't figured out.

In fact, we occasionally increase our holdings of U.S. debt, which is a good thing, at least it indicates an important issue, let's clarify it today.

Let's first look at what happened.

On August 15, the U.S. Department of the Treasury released the report on international capital flows for June 2024.

The data shows that China increased its holdings of U.S. Treasury bonds by $11.9 billion in June, bringing the total to $780.2 billion, which is the largest increase in China's holdings of U.S. debt this year.

Also in June, Japan reduced its holdings of U.S. debt by as much as $10.6 billion, which is not much different from the amount China increased.

Some people with ulterior motives say that Japan reduced its holdings of U.S. debt and we took over, such people are either foolish or malicious, how could we possibly take over U.S. debt from Japan?

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It's easy to understand why Japan is reducing its holdings of U.S. debt, but it's hard to explain why we are increasing ours.

Some smart people say that increasing U.S. debt in June coincided with a rising cycle of U.S. debt, which is a very clever investment.

In fact, we must first rule out the idea that buying U.S. debt at this time is for investment and profit.

It's simple, do you think our country is so big, holding $3.25 trillion in foreign exchange reserves, earning hundreds of billions of dollars in trade surplus every month, and still care about the difference and interest of U.S. debt?

Our foreign exchange reserves are the most in the world, plus state-owned capital and industry, and the resources that can be mobilized, the Chinese government should be the richest government in the world, do we still lack that money?

Moreover, it is now a highly sensitive time, the whole world is watching the moves of China and the United States, we cannot let anyone down, buying U.S. debt is also a highly sensitive matter, containing a strong political meaning, can we buy it casually?

For the same reason, we also rule out the argument that buying U.S. debt is to diversify foreign exchange risks.

We may be even more confused when we say this, since neither is right nor wrong, then why did we buy $11.9 billion in U.S. debt in June?

I don't know if you have noticed that in recent years we have been reducing our holdings of U.S. debt, but there are always a few times in between, occasionally buying some, which has also become a rule, why?

Selling U.S. debt is the general trend, and occasionally buying a few times has also become a rule, how should we understand this wisdom?

In fact, it's not complicated, two reasons.

The first reason, China and the United States have been negotiating, since we are negotiating, there must be some results, negotiations between countries are actually exchanges of interests, we bought U.S. debt, what did the United States give in return?

The United States has also made some concessions, which are not easy to correspond one by one.

For example, postponing the increase in tariffs is very important, whether there is a connection or not, it's hard to say.

The second reason, this is actually a tacit understanding, both between China and the United States and the whole world.

The competition between China and the United States is very fierce, many people are worried about the risk of conflict, which would be a disaster, a disaster for the whole world.

Especially this year, Israel has been making a lot of trouble in the Middle East, the Philippines is not quiet in the South China Sea, Taiwan also occasionally jumps out and shouts a few times, in the eyes of the outside world, the situation is very tense, more and more dangerous.

In contrast, the two major countries of China and the United States have been maintaining contact and communication, trying to avoid the risk of conflict, and the tacit understanding between the two sides is to compete without breaking, and often send various signals to the whole world that S3 will not happen.

So this time it's our turn to tell the whole world that the world is peaceful and S3 will not happen.

The move to increase holdings of U.S. debt shows that we have never thought about taking action, what we have always wanted is to maintain world peace, the community of human destiny is for everyone to develop together, not to destroy together.

In addition, we currently have about $3.25 trillion in foreign exchange reserves, of course, not all of it is in U.S. dollars, there may also be euros, pounds, and even yen.

Our country is so big, business has been done all over the world, foreign exchange reserves are needed to meet market needs at any time, so we need to have a variety of currencies, but they are all valued in U.S. dollars, totaling $3.25 trillion.

Not all of the U.S. dollar is cash, most of it may have been bought in U.S. debt, because we don't need so much U.S. dollar cash.

In fact, if we want to deal with possible intense conflicts and sanctions in the future, the effect of sanctions on us holding U.S. dollars and U.S. debt is the same.

Even holding euros, pounds, and yen may be subject to sanctions, because they are all allies of the United States.

According to this logic, as long as we still need to hold a certain amount of U.S. dollars to deal with international trade and investment, whether to sell off U.S. debt or not is not significant, unless we don't need U.S. dollars either.

For example, suppose we have $1.5 trillion in foreign exchange reserves, of which $780 billion is U.S. debt and $720 billion in U.S. dollars, or $500 billion in U.S. debt and $1 trillion in U.S. dollars, the difference is not significant.

In addition, most of the issuance of U.S. dollars is to print money to buy U.S. debt, and most of the U.S. dollars are also exchanged for U.S. debt, there is no essential difference between the two.

So, we might as well boldly assume that since we don't need too much U.S. dollar cash, a few hundred billion U.S. dollars are enough, then more than $700 billion in U.S. debt could be a reasonable scale.

Does this mean that we will end the reduction of U.S. debt from now on?

However, more important things are coming, U.S. debt is equivalent to us lending money directly to the U.S. government, if they don't do good things, why should we lend them money and help them do evil?

So, if the Americans continue to wave the big stick at us, we still need to accelerate the sale of U.S. debt, and even reduce the reserves of U.S. dollars.