China cuts holdings in US bonds ahead of Yuan's SDR inclusion

China, America's largest creditor, has slashed its US Treasury securities by a whopping USD 22 billion in July reducing it to the lowest since 2013 as it prepared for yuan's inclusion in the IMF's Special Drawing Rights (SDR) next month.
Tu Yonghong, director of the International Monetary Institute at Renmin University here, said given the yuan's official inclusion in the SDR in October, the country may have made certain adjustments to its foreign exchange reserves, a major factor behind the July reduction in Chinese holdings of US Treasury securities.
The cut of USD 22 billion in July has reduced Chinese holdings of US Treasury securities to USD 1.22 trillion, the lowest since 2013.

"After the yuan's official inclusion, some central banks may increase their yuan portfolio to diversify their foreign exchange reserves, thus pointing to the increased supply of US dollars for China.
"In this sense, it is necessary for China to make some preparations, or advanced structural adjustments to its foreign exchange reserves," Tu told the Global Times.
China's foreign exchange reserves, the largest in the world, have dropped from a peak of nearly USD 4 trillion in 2014 to USD 3.185 trillion in August this year raising concerns over steady decline.

China Merchants Bank analyst Liu Dongliang said "considering the currency's official inclusion in the SDR, the move will also serve to stabilise the yuan and help the currency smoothly endure the transition period".

Another reason is because China's central bank is stepping up efforts to strike a balance in the country's foreign exchange reserves, as an increasing number of Chinese enterprises are going global and investing abroad, Liu noted.
Industrial Bank chief economist Lu Zhengwei said since market expectations for a September increase in the US Federal Reserve's benchmark interest rates is quite low, the dollar is likely to face more pressure, thus justifying the central bank's decision to unload US debt.
"Quite a number of factors could explain the result... and there is no need to over-interpret the implications of a monthly change," Tu said.

"More than a quarter of China's cross-border trade is settled using the renminbi, and after the yuan is officially included in the SDR, more countries and regions will accept the yuan as the settlement currency in trade with China," Tu explained. Thus, we need to gradually lower the huge amount of foreign reserves," she said.