Chinese investors sold record amounts of U.S. stocks and bonds in May.

The latest data released by the U.S. Treasury Department on Thursday showed that Chinese funds sold a net $42.6 billion worth of long-term securities, including U.S. Treasuries, agency bonds, corporate bonds and stocks. The total sales in the first five months of this year were $79.7 billion, setting a record high for the January-May period.

More than half of it is in U.S. Treasuries, followed by agency bonds and stocks. On April 25, the yield on the benchmark 10-year Treasury bond climbed to its highest point since November last year.

China is one of the largest foreign holders of U.S. Treasuries, and changes in its holdings are closely watched by bond investors and geopolitical strategists.

Chinese investors may sell U.S. securities to reduce risk because of uncertainty surrounding the U.S. presidential election, said Billy Leung, a Sydney-based investment strategist at Global X Management Co. “There is also the possibility of reducing U.S. dollar holdings due to political influence,” he said.

“Chinese investors have good reasons to diversify away from U.S. assets given the overvalued dollar, expensive U.S. equity valuations relative to Chinese equities, and increased liquidity demand due to deleveraging,” said Wei Liang Chang, macro strategist at DBS Bank. “The divestment trend is likely to continue based on economic fundamentals as well as political uncertainty from the U.S. election.”

China’s holdings of U.S. Treasuries and bonds have fallen by $440 billion since the end of 2017. During that period, the balance of securities held by Belgium, widely seen as a home for Asian countries’ custodial accounts, increased by $159 billion. China’s holdings of U.S. stocks, agency bonds and other debt have also increased, suggesting that China may have moved its dollar assets rather than cut them.

However, the prospect of Fed easing and the resulting dollar weakness could discourage Chinese investors from holding too many dollar assets, said Ken Wong, an Asian equity portfolio specialist at Eastspring Investments Hong Kong Ltd. A weaker dollar could make local securities investments "more attractive," he said.

Article forwarded from: Jinshi Data