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Banking & finance
OpinionComment
David Brown
David Brown

Macroscope | US banking woes compound China’s need for US Treasury alternatives

  • With so much risk flooding the global financial sector, it makes sense for China to look for alternatives to investing in US Treasuries
  • However, questions remain over how to diversify that risk and maximise returns at the same time, given the ubiquity of the US dollar

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People walk past the US Department of the Treasury in Washington on March 30. China has moved to reduce its holdings of US Treasuries in recent months, but good alternatives for Chinese investment are few and far between. Photo: AFP
David Brown

The world has entered into a new phase of global instability, making it imperative again for investors to batten down the hatches against the spectre of rising risk. The aftermath of the Covid-19 pandemic, the effects of the Ukraine war, the recent inflation spike and now the latest banking crisis are making it that much harder for investors to choose where they should ideally lie on the investment curve to mitigate their risks.

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For large sovereign investors such as China, the challenge is made even harder by the fact that its traditional bolt-holes are looking less secure.

The US dollar may be regarded as the go-to safe haven in a troubled world, but with so much specific risk originating in the United States right now, Beijing might be better off looking elsewhere for better protection.
The trouble is that the scope for suitable alternatives is limited. China is already in the process of reducing its risk exposure to US sovereign risk. Its holdings of US Treasury bonds fell to US$859 billion in January, its lowest level since 2009, marking a fall of 17 per cent over the last year alone.
The impact of the US Federal Reserve’s interest rate tightening during the last year and the associated uncertainty in the US Treasury bond market has been an obvious cause for concern, but there are deeper worries now about the risk of wider systemic risk considering the problems evident in global banking sector over the last few weeks. The problems arising from the collapse of Silicon Valley Bank and fears of contagion spreading more widely through financial markets will have not helped matters.
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While financial market turmoil seems to have settled down for the time being and fears about further Fed tightening will have eased following better-than-expected US inflation news, recession worries and concerns about a possible US debt default still need to be weighed.

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