Latest / China Economy with Fexingo: Beijing's Policies, Trade, and Asia-Pacific Markets / Why Chinese Companies Are Buying US Treasury Bonds Again
Transcript
- Lucas: Alight, Luna — I want to talk about something that looks like a contradiction on the surface. Chinese companies are buying US Treasuries again. Not just the central bank, not just state-owned institutions — actual corporations, large exporters, tech firms. And they're doing it at a time when the yuan is under pressure and trade tensions are, if anything, escalating. Luna: That does feel counterintuitive. I mean, if you're a Chinese exporter, why would you park cash in the assets of a country you're supposedly in a trade war with? Lucas: Right. So let's look at the numbers. The trade-weighted dollar index is at 120.1 as of early June. The yuan is at 6.77 per dollar, basically flat from a month ago but still weak relative to where it was a year ago. And yet, according to recent Treasury data — the March 2026 report, which came out last month — Chinese private holdings of US government debt rose by about $18 billion. That's the third consecutive monthly increase. Luna: So the private sector is stepping in while the central bank has been slowly reducing its holdings. Is that the story? Lucas: Exactly. China's official holdings — the People's Bank of China — have been declining gradually for years, down from over $1 trillion in 2013 to around $750 billion now. But the private sector has been adding. And what's driving it is a mix of yield-seeking and hedging. Luna: Hedging against what? Domestic risks? Lucas: Partly. Look at the Chinese stock market — the FXI, which tracks large-cap Chinese stocks listed in the US, is up about 1.8% over the past week, but it's still down significantly from its highs. The property sector is still in a funk. Local government debt is a persistent concern. So for a Chinese company with dollar-denominated revenues — say, an exporter that gets paid in dollars — holding dollars in US Treasuries is actually a very rational move. You earn a yield, you avoid currency conversion costs, and you keep your liquidity in a safe asset. Luna: And the yield on the ten-year Treasury is still around 4.3% — that's attractive relative to what you'd get on a Chinese government bond, which is around 2.1%. Lucas: That's a key point. The spread is over 200 basis points. So for a corporate treasurer, the calculation is straightforward: I can hold yuan-denominated assets and earn 2%, or I can hold dollar-denominated Treasuries and earn 4.3%, with the added benefit that my revenues are already in dollars. The only risk is if the yuan appreciates sharply, but given the current environment — with the trade-weighted dollar staying strong — that doesn't seem imminent. Luna: But isn't there a political angle here? Beijing has been pushing for yuan internationalization, encouraging companies to settle trade in yuan and reduce dollar dependence. This trend seems to go against that. Lucas: It does, on the surface. But I think the reality is that Beijing's messaging and corporate behavior are not always aligned. The government can encourage yuan settlement, but if the math favors dollars, companies will follow the math. And it's not just Chinese companies — we're seeing similar flows from other Asian exporters. Japanese insurers, Korean tech firms, they're all adding to their Treasury holdings. Luna: So it's a broader Asian phenomenon, not just a China story. Lucas: Exactly. The yen is at 160 per dollar, the won has been under pressure — there's a general preference for dollar assets across the region. But for China specifically, it also reflects a shift in who is making these investment decisions. In the past, a lot of capital flows were controlled by the state. Now, with more private sector autonomy — and with the rise of tech companies that generate significant dollar revenues — the decision-making is more decentralized. Luna: Which brings us to the question: does this create a vulnerability for China? If the US were to impose sanctions or freeze assets — like they did with Russia — Chinese companies holding Treasuries could be exposed. Lucas: That's the elephant in the room. And I think Chinese treasurers are aware of it. But the counterargument is: what's the alternative? Euro-denominated bonds? Yields there are lower. Gold? Illiquid and costly to store. Chinese government bonds? The market is deep, but foreign access is still limited and the yield is lower. So US Treasuries remain the deep, liquid, high-quality asset class that global investors default to. Even with geopolitical risk, the opportunity cost of not holding them is high. Luna: And the data suggests that for now, the risk is being accepted. Let's talk about the impact on Chinese equities. If companies are buying Treasuries instead of reinvesting in their own businesses, does that starve the domestic economy of capital? Lucas: It's a valid concern. If a company like Alibaba or Tencent — both of which have large dollar cash piles — decides to allocate more to bonds rather than R&D or acquisitions, that could weigh on growth. But I think the more direct impact is on the currency. When companies buy Treasuries, they're effectively selling yuan and buying dollars, which puts downward pressure on the yuan. That's actually helpful for exporters, because it makes their goods cheaper abroad. So there's a feedback loop: weaker yuan encourages more exports, which generates more dollar revenues, which get recycled into Treasuries. Luna: So it's almost a self-reinforcing cycle. And that's partly why the yuan has been relatively stable around 6.77 despite the trade tensions — because there's constant demand for dollars from the corporate sector. Lucas: Precisely. The PBOC doesn't have to intervene as much because the private sector is providing the dollar demand. That's actually a healthier dynamic than having the central bank burn through its reserves to prop up the currency. It's market-driven. Luna: But for how long? If the us iran peace deal that came out this morning leads to a rally in risk assets and a weaker dollar, that could change the calculus. Lucas: That's the near-term wildcard. The dollar index has been strong, but if the deal holds and oil prices fall, the dollar could weaken. That would reduce the appeal of Treasuries for foreign buyers. But I think for Chinese companies specifically, the hedging motive is strong enough that a small dollar decline won't reverse the trend. They're not just chasing yield — they're managing risk. Luna: Speaking of managing risk, this feels like a good moment to mention that keeping this podcast ad-free and independent is important to us. If you find these conversations useful, you can support the show at buymeacoffee.com/fexingo. It helps us keep doing the deep dives without any corporate strings attached. Lucas: Yeah, listener support is what allows us to take the time to dig into topics like this — the data, the nuance, the stuff that doesn't fit into a two-minute news clip. So if you're able, that link again is buymeacoffee.com/fexingo. And now back to the economics. Luna: Alright, so we've established that Chinese companies are buying Treasuries for yield and hedging. But let's look at one specific sector: the tech companies. Alibaba, ticker symbol b a b a, is down about 5% over the past week. JD.com is flat. Baidu is down almost 3%. These companies have huge dollar reserves. Are they the ones driving this trend? Lucas: They're a big part of it. Alibaba alone had over $60 billion in cash and short-term investments as of their last filing. A significant portion of that is in dollar-denominated assets. And given the regulatory uncertainty in China — the tech crackdown hasn't fully eased — they're probably more inclined to keep money offshore in safe assets. It's not just about yield; it's about maintaining flexibility. Luna: So the Treasury buying is, in a way, a vote of no confidence in the domestic investment environment? Lucas: To some extent, yes. If you're a Chinese tech company, the path to growth is increasingly overseas — Southeast Asia, Latin America, the Middle East. That requires dollars. So holding Treasuries is a way to preserve capital while you figure out your next move. It's not necessarily bearish on China overall, but it is a reflection of where the opportunities are right now. Luna: And what about the smaller exporters? The ones that don't have billion-dollar treasuries? Lucas: They're probably not buying Treasuries directly. They might be holding dollars in bank accounts, which gets intermediated into the bond market through the banking system. So the aggregate data captures that too. The point is, the private sector as a whole is increasing its dollar asset holdings, and a lot of that ends up in Treasuries. Luna: Alright, so let's sum up: Chinese companies are buying US Treasuries because the yield spread favors dollars, because they have dollar revenues to hedge, and because domestic investment options are less attractive. It's a rational response to the current environment, even if it seems politically awkward. Lucas: And it's a trend that's likely to continue as long as the dollar remains strong and Chinese domestic yields remain low. The wildcard is geopolitical — if relations deteriorate further, we could see capital controls tighten. But for now, the market is speaking, and it's saying: give me Treasuries. Luna: Good place to leave it. Thanks, Lucas. Lucas: Thanks, Luna.