China and Japan are ditching US Treasuries like never before. In the third quarter of 2024, Japan sold a staggering $61.9 billion of US government debt—the biggest quarterly sale on record.
This came right after they offloaded $40.5 billion in the second quarter. Not to be left out, China dumped $51.3 billion in the same period, its second-largest reduction in history.
For China, this is the continuation of a trend. The country has reduced its Treasury holdings in six out of the last seven quarters.
Even more shocking, their total holdings have now dropped below $800 billion, a level not seen in 16 years. What’s driving this dramatic pullback by two of the world’s largest foreign creditors?
China’s Treasury dump tied to yuan defense
China’s aggressive Treasury sell-off is closely linked to its strategy to protect the yuan. The People’s Bank of China (PBOC) has been on high alert ever since Donald Trump’s election victory, which came with renewed threats of tariffs.
The PBOC has been setting its daily reference rate stronger than 7.2 yuan per dollar, signaling its determination to support the currency despite market pressures.
On Tuesday, the central bank set the fixing at a one-week high, defying expectations that it might cave to market forces. Trump, now president-elect, has already vowed to impose a 10% tariff on Chinese goods, accusing Beijing of failing to fight fentanyl trafficking.
“Until such time as they stop, we will be charging China an additional 10% tariff,” Trump posted on Truth Social. Unsurprisingly, the offshore yuan dropped, trading around 7.26 against the dollar.
This isn’t the first time China has faced this kind of tug-of-war. Back in 2015, the PBOC allowed the yuan to weaken significantly, leading to capital outflows that shook the country’s financial stability. Memories of that period seem to be driving today’s cautious approach.
But traders aren’t convinced that the PBOC can hold its ground. Historically, Beijing has drawn “red lines” for the yuan, only to retreat under market pressure. In 2019, for instance, the currency slipped past 6.9 per dollar and later breached 7, its weakest point since the global financial crisis.
The stakes are higher this time. China is balancing its need to defend the yuan with its goal of reigniting economic growth. A stronger currency can stabilize investor confidence but risks stalling exports, a critical driver of the economy.
Japan’s sales linked to domestic pressures
Japan’s record-breaking sale of US Treasuries, on the other hand, seems more tied to domestic needs. Prime Minister Shigeru Ishiba recently unveiled a ¥39 trillion ($250 billion) stimulus package to help Japanese households and businesses cope with rising costs.
Ishiba emphasized the urgency of raising wages across all generations, saying, “This needs to happen now and in the future.”
To fund these measures, Japan is clearly pulling back on its investments in US debt. The ¥13.9 trillion cost of the package reflects the government’s focus on domestic stability.
Japan’s ruling coalition, now a minority in parliament, has had to make deals with smaller parties to get the stimulus plan approved. While the country sold a record $61.9 billion in Q3, this follows another massive reduction in Q2.
Trump’s first trade threats shake markets
Trump has made his first trade war threats, and markets are already feeling the heat. He’s promising a 10% tariff on Chinese goods and a 25% tariff on imports from Mexico and Canada. The news has hit currencies hard.
The Canadian dollar just dropped to a four-year low, and the Mexican peso is at its weakest since 2022. “Drugs are pouring into our country, mostly through Mexico, at levels never seen before,” he posted. He also said he’ll sign an executive order for these tariffs on day one of his presidency.
Markets reacted fast. The offshore yuan slipped as traders doubted China’s ability to keep its currency stable. Trump’s tough talk comes days after naming Scott Bessent as the next Treasury Secretary.
Some thought Bessent’s appointment might mean a softer approach, but Trump’s latest moves show he’s not budging from his hardline trade stance.
The sell-offs from China and Japan raise some serious questions. What happens to US debt markets now? How does this change the global financial balance of power? One thing’s for sure—China and Japan aren’t playing the same game they used to.
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