Due largely to botched exchange rate policy, China has seen foreign reserves shrink considerably from a mid-2014 peak. This suggests Beijing is being forced to sell US Treasury bonds, which some worried would drive up American interest rates. It has not turned out that way.

Official Chinese foreign exchange reserves peaked at $4 trillion in June 2014 and fell all the way to $3.2 trillion this past January. This is being portrayed in some quarters as a crisis; it’s not.

But it is something of a problem, and might have an impact on the US if loss of reserves took the form of selling Treasuries. The much-watched “major foreign holders” series puts direct ownership by China at almost exactly the same level in December 2014 as December 2015, a pronounced stability which occurs all too frequently in Chinese numbers.

Meanwhile Belgium, which saw an oh-so-mysterious rise in 2014 when China’s reserves were still expanding, had holdings of Treasuries plunge more than $200 billion over the course of 2015 when China’s reserves contracted. In recent years, most nominally Belgian transactions in American bonds have been understood to be ultimately conducted by or for Chinese parties.

Beijing has thus been selling, but the nature and magnitude are better seen in just-released, broader numbers Treasury publishes on an annual basis. These include all securities, including stocks and bond types other than Treasuries. The latest available figures are for June 2015 and show Chinese holdings at an all-time high of $1.85 trillion, up a bit from June 2014.

China is second on the list of foreign investors to Japan’s $1.9 trillion. Other major buyers are the UK at $1.45 trillion and, crucially, the Cayman Islands ($1.5 trillion) and Luxembourg ($1.3 trillion). The latter two are international capital centers to an even greater extent than Belgium, meaning some part of the huge figures for such tiny economies is Chinese money.

Both the Caymans and Luxembourg were said to have larger holdings of American securities at mid-2015 than mid-2014, adding to the impression that true Chinese holdings rose over this period. The less informative monthly figures indicate purchases through the Caymans and Luxembourg continued through the end of the 2015.

These demonstrate that the drop in Belgian Treasury holdings over 2015 does not indicate a major sell-off from the full range of China’s direct and indirect ownership of American securities. With that settled, could such a sell-off still be yet to come if capital flight out of the PRC continues – yes.

But direct Chinese holdings of American securities account for less than 11 percent and indirect holdings 2.5-6 percent of just the foreign ownership share. China’s total is $2.2-$2.6 trillion. The size of the US bond market as a whole is about $40 trillion; capitalization of US stocks over $20 trillion. Even if China sells, interest rate pressure will have to come from somewhere else.

IMAGE: US Treasury Secretary Jack Lew (L) speaks with Chinese Premier Li Keqiang iin Beijing, China, February 29, 2016. REUTERS/Wu Hong.

 For more on this story go to: http://www.aei.org/publication/china-and-american-bonds-the-latest/