U.S. debt holdings surged, holdings rose. The two major U.S. "creditors", China and Japan, increased their debt holdings for two consecutive months.

U.S. official data shows that in December last year, when the Federal Reserve signaled a dovish turn this year and market expectations for an interest rate cut this year further increased, the collective holdings of China and Japan, the United States' two major overseas "creditors", continued to increase in value.

On Thursday, February 15, Eastern Time, the U.S. Department of the Treasury released the December 2023 International Capital Flows Report (TIC). The report shows that in December, Japan held US$1.1382 trillion in US Treasury bonds, with its total holdings hitting a new high since August 2022, an increase of US$10.7 billion from November. At this point, Japan has increased its U.S. bond holdings for three consecutive months and for the sixth month in the last seven months.

Since its holdings surpassed China's in June 2019, Japan has been the largest overseas holder of U.S. Treasury bonds. In the whole year of 2023, Japan's holdings fell only in February, May and September, as May reduced its holdings by US$30.4 billion, the largest monthly reduction in seven months. By December, Japan's full-year holdings had a net increase of 631 One hundred million U.S. dollars.

According to the TIC report, as of December, mainland China’s U.S. debt holdings still ranked second among countries outside the United States. Mainland China held US$816.3 billion in U.S. Treasury bonds in December, an increase of US$34.3 billion from the previous month. After seven consecutive months of decreases in U.S. bond holdings, it has increased for two consecutive months. The total holdings continue to break away from the five consecutive months of May 2009. The lowest point since 14 years.

Since April 2022, China’s U.S. debt holdings have been below $1 trillion. In 2023 alone, China's U.S. debt holdings will decrease by a net US$50.8 billion. China only saw increases in March, November and December throughout the year. Among the nine months of reductions, only April and October saw decreases of less than US$10 billion, while the other months all saw decreases of more than US$10 billion.

The sharp rebound in U.S. bond prices in the last two months of 2023 has increased overseas central banks' interest in allocating U.S. debt. It would not be surprising if the two major "creditors" China and Japan increase their holdings of U.S. debt.

Market data shows that in December 2023, the three major U.S. stock indexes all rose for two consecutive months; the price of U.S. bonds also rose for two consecutive months, and U.S. bond yields fell for two consecutive months after rising for six consecutive months. The yield on the benchmark ten-year U.S. Treasury bond fell by about 105 basis points in November and December, the largest two-month drop since the 2008 financial crisis; the U.S. dollar index (104.2766, -0.0002, -0.00%) fell for two consecutive months; New York Gold futures have risen for three months in a row.

The State Administration of Foreign Exchange announced last month that at the end of December, China's foreign exchange reserves were US$3.238 trillion, an increase of US$66.2 billion or 2.1% from the end of November. The scale had increased for two consecutive months after falling for three consecutive months. The State Administration of Foreign Exchange reiterated that the increase in the scale of foreign reserves was affected by a combination of factors such as exchange rate translation and changes in asset prices, pointing out that the U.S. dollar index fell in December and global financial asset prices generally rose.

Previously, media mentioned that analysts believe that China’s reduction in U.S. debt holdings is partly due to supporting the RMB (7.1936, 0.0012, 0.02%) exchange rate. Some domestic media mentioned that industry insiders believe that whether the decline in U.S. bond yields can attract overseas central banks such as China to increase their holdings of U.S. bonds depends largely on the needs of each country's own diversified allocation of foreign reserve assets. As central banks of various countries accelerate the diversification of their foreign reserve allocations, more and more central banks are considering allocating gold as an alternative to U.S. debt.

Data from the State Administration of Foreign Exchange show that at the end of December, China’s official gold reserves were 71.87 million ounces, an increase of 290,000 ounces from the end of November, and an increase for 14 consecutive months. Since November 2022, the Central Bank of China has increased its gold holdings by approximately 9.23 million ounces in 14 months, making it the world's major gold buyer.

The continued growth of China's gold reserves is the epitome of the gold-buying boom by global central banks in recent years. According to data from the World Gold Council, in the third quarter of 2023, global central banks purchased 337 tons of gold on a net basis, the third highest quarterly net purchase in history. In the first three quarters of 2023, global central bank gold purchase demand increased by 14% year-on-year, reaching a record high of 800 tons. Wang Lixin, CEO of the World Gold Council in China, said that gold demand in the fourth quarter was still rising steadily.