Long-term projections for US government finance are dire to say the least, and the speed and extent to which that becomes a serious problem depends in large part on sustained foreign demand for US Treasuries.

Recent data suggests that that demand has begun to dry up.

Impact

Foreign governments have been trimming their purchases of US Treasuries over the latter part of 2018, with China leading the way. The People’s Bank of China (PBoC) shed $12.5 billion in USD holdings over the month of October, its fifth such monthly decline in a row. China’s Treasury pile stands at $1.13 trillion as of October – still substantial enough to make China the biggest foreign holder of US debt (just ahead of Japan’s $1.018 trillion).

China’s US debt holdings is a closely-watched metric, as Chinese purchases have helped keep US borrowing costs down over the past two decades. These purchases have come into even sharper relief with the advent of the US-China trade war. And though a mass sell-off of China’s US debt has sometimes been floated as a potential point of leverage in Beijing’s rivalry with Washington, it’s not an appealing policy option because of the damage it would do to China’s remaining USD-denominated holdings (the more Treasuries they sell, the less valuable the remaining stash). In reality, if China was to enact a long-term shift away from Treasuries in its forex portfolio, it would look exactly like what we’re currently seeing: a slow and gradual pivot away from them. It’s also possible that Beijing is merely liquidating its USD-denominated holdings in an effort to shore up the declining renminbi.