China plans to significantly boost funding from ultra-long treasury bonds in 2025 to stimulate business investment and consumer-friendly initiatives, an official from a state planning agency mentioned on Friday, as Beijing increases fiscal measures to rejuvenate the struggling economy.
Yuan Da, deputy secretary-general of the National Development and Reform Commission (NDRC), stated at a press conference that special treasury bonds will fund extensive equipment upgrades and consumer goods trade-ins.
Yuan noted, “The amount of ultra-long special government bond funds will be significantly increased this year to enhance and broaden the execution of the two new initiatives.”
Under the program implemented last year, consumers are allowed to exchange old cars or appliances for discounts on new purchases, along with a separate scheme that provides subsidies for large-scale equipment upgrades aimed at businesses.
Yuan mentioned that households will qualify for subsidies this year to purchase three categories of digital products, which include cell phones, tablets, smart watches, and fitness bracelets.
“The quantity of ultra-long special government bond funds will be notably increased this year to amplify and extend the application of the two new initiatives,” Yuan reiterated.
The program initiated last year allows consumers to trade in worn-out cars or appliances to obtain discounts on new models, alongside a distinct program that subsidizes businesses for significant equipment upgrades.
Yuan stated that households will also be entitled to financial support for acquiring three kinds of digital products this year, such as cell phones, tablets, smart watches, and fitness bracelets.
In December, the NDRC declared that Beijing had fully distributed all proceeds from 1 trillion yuan ($136.68 billion) in ultra-long special treasury bonds for 2024, with around 70% of the proceeds allocated to “two major projects” and the rest directed towards the new initiatives.
Chinese authorities have committed to “vigorously” enhancing consumption this year, leading to heightened expectations of further policy actions to stimulate demand and counter deflationary pressures.
This week, many government employees across China received unexpected salary increases, according to individuals impacted by the decision, as Beijing seeks to encourage spending.
China also plans to boost funding from specialized treasury bonds and broaden the scope of another initiative aimed at supporting critical strategic sectors, Zhao Chenxin, the vice head of the state planner, informed the press conference.
He added that the government has pre-approved projects worth 100 billion yuan for 2025 under this program.
The major initiatives pertain to projects such as railway and airport construction, farmland development, and enhancing security capabilities in crucial sectors, based on official documents.
The world’s second-largest economy has faced challenges in recent years stemming from a significant property crisis, elevated local government debt, and weak consumer spending.
Exports, one of the few favorable aspects, may confront additional U.S. tariffs if Donald Trump returns to the presidency.
According to a report from Reuters last month, officials have agreed to issue special treasury bonds totaling 3 trillion yuan in 2025, which would set a new record.
EXPECTED STRONG FISCAL STIMULUS
China will likely permit local governments to raise the issuance of special bonds to 4.7 trillion yuan this year, up from 3.9 trillion yuan in 2024, as stated by Zhang Ming, a senior economist at the Chinese Academy of Social Sciences, a leading state think tank.
The cumulative total of special treasury bonds, local bonds, and the annual budget deficit may reach nearly 13 trillion yuan this year, roughly 9-10% of the gross domestic product, Zhang mentioned in an article published on the China Chief Economist Forum’s website.
“Such a level of comprehensive deficit would be uncommon in history,” Zhang remarked.
Last month, Reuters reported that Chinese leaders have decided to increase the budget deficit to 4% of GDP in 2025, the highest level ever while aiming for an economic growth target of around 5%.
NDRC’s Yuan expressed that China has significant policy flexibility to support growth this year.
“We have complete confidence in promoting ongoing economic recovery this year.”
It is anticipated that China’s central bank will lower its key policy rate from the current 1.5% “at an appropriate time” in 2025, as reported by the Financial Times on Friday, citing statements made by the bank, as part of Beijing’s efforts to bolster growth.
($1 = 7.3166 Chinese yuan renminbi)
Chinese officials have decided to issue special treasury bonds worth 3 trillion yuan ($411 billion) next year, according to two sources, marking the highest amount on record as Beijing enhances fiscal measures to stimulate a struggling economy.
The sovereign debt issuance plan for 2025 represents a significant increase from this year’s 1 trillion yuan and is in response to an anticipated rise in U.S. tariffs on imports from China following Donald Trump’s inauguration in January.
The funds raised will be directed towards increasing consumer spending through subsidy programs, upgrading business equipment, and financing investments in innovation-led advanced sectors, among other initiatives, according to the sources.
The sources, who are privy to the discussions, chose to remain anonymous due to the sensitive nature of the information.
The State Council Information Office, which manages media inquiries for the government, along with the finance ministry and the National Development and Reform Commission (NDRC), did not immediately reply to a request for comment from Reuters.
Following the news, China’s 10-year and 30-year treasury yields increased by 1 basis point (bp) and 2 bps, respectively.
The upcoming issuance of special treasury bonds next year would be the largest in history and highlights Beijing’s readiness to incur more debt to combat deflationary pressures in the world’s second-largest economy.
“This issuance ‘surpassed market expectations,'” stated Tommy Xie, who leads Asia Macro research at OCBC Bank.
“Moreover, as the central government is the only body with the capacity for further leverage, any bond issuance at the central government level is seen as a favorable development, likely offering incremental support for growth.”
Typically, China does not include ultra-long special bonds in its annual budget plans, viewing these instruments as exceptional measures to generate funds for certain projects or policy objectives as necessary.
Within the framework of the upcoming year’s plan, approximately 1.3 trillion yuan raised from long-term special treasury bonds will support “two major” and “two new” initiatives, said the informed sources.
The “new” initiatives include a subsidy program for durable goods that allows consumers to exchange old cars or appliances for discounts on new ones, along with a separate program that subsidizes extensive equipment upgrades for businesses.
The “major” initiatives refer to projects aligned with national strategies, such as the construction of railways, airports, and agricultural land as well as enhancing security capabilities in essential sectors, according to official documents.
On December 13, the state planner NDRC announced that Beijing had fully allocated all proceeds from this year’s 1 trillion yuan in ultra-long special treasury bonds, with about 70% directed toward the “two major” projects and the remaining portion funding the “two new” programs.
TARIFFS THREAT
A significant share of the projected proceeds for next year will also be allocated to investments in “new productive forces,” a term used by Beijing to refer to advanced manufacturing, including electric vehicles, robotics, semiconductors, and green energy, according to the sources.
One source mentioned that over 1 trillion yuan would be set aside for this initiative, with the remainder used to recapitalize major state banks that are facing challenges due to shrinking margins, declining profits, and a rise in non-performing loans.
Next year’s issuance of new special treasury debt would represent 2.4% of the gross domestic product (GDP) for 2023. In 2007, Beijing raised 1.55 trillion yuan through such bonds, amounting to 5.7% of economic output at that time.
President Xi Jinping met with senior officials during the annual Central Economic Work Conference (CEWC) on December 11 and 12 to outline the economic strategy for 2025.
A summary of the meeting from state media indicated that it is “essential to uphold stable economic growth,” increase the fiscal deficit ratio, and issue more government debt in the upcoming year, though no specific details were provided.
Last week, Reuters reported, based on sources, that China intends to raise the budget deficit to an unprecedented 4% of GDP next year, while maintaining an economic growth target of around 5%.
At the CEWC, Beijing establishes targets for various aspects, including economic growth, budget deficit, debt issuance, and other areas for the year ahead.
While such targets are typically agreed upon by senior officials, they are not formally announced until the annual parliament session in March and may still be subject to change before that time.
China’s economy has encountered difficulties this year due to a significant property crisis, high indebtedness among local governments, and weak consumer demand. Exports, which have been one of the few positive aspects, could soon confront U.S. tariffs exceeding 60% if Trump follows through on his campaign promises.
Given the export risks, China will need to depend on domestic growth sources, but consumers feel financially constrained due to declining property values and minimal social safety nets. Weak household consumption also poses a substantial risk.
Recently, officials announced that Beijing plans to broaden the consumer goods and industrial equipment trade-in programs.
Why China Buys U.S. Debt With Treasury Bonds
China has consistently built up its holdings of U.S. Treasury securities over the past several decades. As of August 2024, the country possessed $774.6 billion in Treasuries (government-issued bonds), which represents the primary form of U.S. debt owed to China.
Some market analysts and investors worry that China might sell off these Treasuries as a form of retaliation, arguing that such a move could increase interest rates and negatively impact economic growth. Since 2018, the quantity of Treasuries held by China has been on a downward trend. This article explores the economic activities related to China’s investment in U.S. debt.
Chinese Economics
China functions primarily as a manufacturing center and relies on exports for economic growth. According to trade statistics from the U.S. Census Bureau, China has maintained a significant trade surplus with the U.S. since 1985, meaning it exports more to the U.S. than it imports from it.
Chinese exporters receive U.S. dollars (USD) for the goods they sell to the U.S., but they require renminbi (RMB or yuan) to compensate their workers and manage local finances. To acquire RMB, they convert the dollars they earn from exports, which increases the supply of USD and boosts demand for RMB.
The People’s Bank of China (PBOC) actively intervenes to mitigate this imbalance between the U.S. dollar and the yuan in domestic markets. It purchases the excess U.S. dollars from exporters in exchange for the necessary yuan.
The PBOC has the authority to print yuan as required. This intervention effectively creates a scarcity of U.S. dollars, which helps maintain higher USD rates. Consequently, China accumulates USD as part of its foreign exchange reserves.
Self-Correcting Currency Flow
International trade, which involves exchanging two currencies, incorporates a self-correcting mechanism. For example, if Australia is experiencing a current account deficit, meaning it is importing more than it exports.
The countries supplying goods to Australia receive Australian dollars (AUD) in return, leading to an excess of AUD in the global market, which results in a depreciation of the AUD against other currencies.
As the AUD weakens, it makes Australian exports cheaper and imports more expensive. Over time, Australia will likely export more and import less due to its cheaper currency, thereby reversing the initial situation. This self-correcting mechanism is a regular occurrence in the international trade and foreign exchange markets, often occurring with minimal intervention from authorities.
China’s Need for a Weak Renminbi
China’s strategy is to sustain growth driven by exports, which fosters job creation and keeps a large portion of its population engaged productively. This export-led growth strategy requires the RMB to remain weaker than the USD, allowing for lower prices.
If the PBOC ceased its intervention as previously described, the RMB would naturally appreciate, making Chinese exports more expensive. This would trigger a significant unemployment crisis due to a decline in export business.
To maintain its competitive edge in international markets, China seeks to prevent the RMB from appreciating. This is accomplished through the aforementioned mechanism, resulting in a substantial accumulation of USD as foreign exchange reserves.
PBOC Strategy and Chinese Inflation
While other labor-intensive, export-oriented countries like India implement similar strategies, they do so to a far lesser degree. A significant challenge arising from this approach is the occurrence of high inflation.
China’s economy is tightly controlled by the state, allowing it to manage inflation through methods such as price controls and subsidies. Other nations, lacking similar levels of control, are subject to the market pressures associated with a free or partially free economy.
China’s Use of USD Reserves
As of August 2024, China’s central bank held roughly $3.3 trillion in total foreign exchange reserves. In addition to the U.S., it also trades extensively with other regions, including Europe, with the euro representing the second largest segment of its forex reserves.
China has to invest its enormous reserves to earn at least a risk-free interest rate. By accumulating trillions in U.S. dollars, China has determined that U.S. Treasury securities represent one of the safest investment options for its foreign exchange reserves.
With its euro reserves, China might consider investing in European debt. Additionally, some U.S. dollar reserves could potentially be allocated to invest in euro debt for better returns.
China prioritizes the stability and safety of its investments above all else. Despite the eurozone existing for about two decades, it remains somewhat unstable. There’s even uncertainty regarding the long-term future of the Eurozone (and the euro). Therefore, transferring assets from U.S. debt to euro debt is generally discouraged, especially when the alternative asset is perceived as riskier.
Other asset classes such as real estate, stocks, and foreign treasuries carry significantly more risk than U.S. debt. Forex reserves are not excess funds meant to be invested in high-risk securities in search of greater returns.
One alternative for China is to utilize the dollars in different ways. For instance, these dollars could be used to purchase oil from Middle Eastern countries. However, those countries would also need to reinvest the dollars they acquire.
Ultimately, due to the dollar’s status as the global trade currency, any supply of dollars typically ends up in a nation’s forex reserves or in the safest investment—U.S. Treasury securities.
Consequences of China Purchasing U.S. Debt
Investing in U.S. debt provides a secure option for Chinese forex reserves, which essentially translates to China lending money to the U.S. so that it can continue to import Chinese goods.
Therefore, as long as China maintains an export-driven economy with significant trade surplus with the U.S., it will continue accumulating U.S. dollars and U.S. debt. The loans China extends to the U.S. through these debt purchases allow the U.S. to procure Chinese products.
This results in a mutually beneficial scenario for both countries, with advantages for each. China has a vast market for its goods, while the U.S. gains from the economic pricing of Chinese products. Beyond their prominent political tensions, both nations are inevitably interdependent, from which they both gain.
USD as a Reserve Currency
Essentially, China is investing in the current global reserve currency. Historically, gold served as the universal standard for reserves until the 19th century when it was supplanted by the British pound sterling. Nowadays, U.S. Treasuries are deemed nearly the safest investment.
In addition to the extensive history of gold used by numerous nations, examples exist where various countries held considerable reserves of British pounds sterling after World War II. These nations did not plan to expend their GBP reserves or invest in the U.K., but merely kept the pound sterling as a secure reserve.
However, when those reserves were liquidated, the U.K. experienced a currency crisis. The economy suffered due to an oversupply of its currency, which resulted in elevated interest rates. Could a similar situation occur for the U.S. if China were to sell off its U.S. debt holdings?
It is important to recognize that the economic framework post-World War II mandated the U.K. to uphold a fixed exchange rate. Due to these limitations and the lack of a flexible exchange rate system, the divestment of GBP reserves by other nations brought about significant economic repercussions for the U.K.
Conversely, as the U.S. dollar follows a variable exchange rate, any divestment by a country holding substantial U.S. debt or dollar reserves will cause adjustments to the international trade balance. Any U.S. reserves offloaded by China would either be absorbed by another nation or returned to the U.S.
Implications
The consequences of such a divestment would be more severe for China. An excess of U.S. dollars would likely lead to a drop in USD values, thereby increasing the valuation of the RMB. This would make Chinese products costlier, resulting in a loss of their pricing edge. Such an outcome would not appeal to China, as it lacks economic justification.
If China, or any other country with a trade surplus with the U.S., decided to cease its investments in U.S. Treasuries or commenced dumping its U.S. forex reserves, it would transition from a trade surplus to a trade deficit—an outcome undesirable for any export-driven economy, resulting in negative repercussions.
The ongoing concerns surrounding China’s holdings of U.S. Treasuries or fears of Beijing selling them off are unwarranted. Even if this were to occur, the dollars and debt instruments would not disappear; they would simply move to different vaults.
U.S. Debt to China: Risk Assessment for America
While this continual process has led to China becoming a creditor to the U.S., the overall situation may not pose a significant challenge for the U.S. Given the detrimental effects that China would face from liquidating its U.S. reserves, it is unlikely that China (or any other country) would pursue this course of action.
Even if China were to go ahead and sell off these reserves, the U.S., functioning as a free economy, possesses the ability to print as many dollars as necessary. The U.S. could also implement other strategies such as quantitative easing (QE).
Although increasing the money supply would diminish the value of its currency and heighten inflation, this approach would ultimately benefit U.S. debt. The real repayment value would decline in line with inflation, which is advantageous for the debtor (the U.S.) but detrimental for the creditor (China).
Despite the rising U.S. budget deficit, the likelihood of the U.S. defaulting on its debt remains virtually nonexistent (unless there is a political decision to do so). In essence, the U.S. may not require China to consistently buy its debt; rather, it is China that depends on the U.S. for its continued economic growth.
U.S. Debt to China: Risk Perspective for China
China should worry about lending money to a country that can print as much currency as it desires. If inflation in the U.S. rises, it would negatively impact China since the actual value of repayments would decrease in such circumstances.
Whether willingly or not, China must continue to acquire U.S. debt to maintain its exports’ price competitiveness on the global stage.
Is China Increasing or Decreasing Its U.S. Treasuries Holdings?
China’s U.S. Treasuries holdings reached their highest point between 2012 and 2016, exceeding $1.3 trillion. Since then, they have gradually declined, dropping below $1 trillion for the first time in mid-2022, and as of August 2024, they are at $774.6 billion.
Is China the Largest Foreign Holder of U.S. Debt?
No, as of now, China ranks as the second-largest holder of U.S. Treasuries, with Japan holding approximately $1.1 trillion as of August 2024.
Why Does China Buy U.S. Treasuries?
China purchases U.S. Treasuries for several reasons. Firstly, these securities are considered some of the safest assets available, offering security and stability, while the U.S. dollar remains the primary reserve currency for global trade. This enables the Chinese central bank to effectively hold assets denominated in dollars.
However, the key reason is that China receives an excess of U.S. dollars due to the trade imbalance, as its exports to the U.S. surpass imports. Yet, Chinese businesses and their employees need to be compensated in Chinese currency. Consequently, the Chinese banking system needs to exchange dollars with the central bank, which must then manage those dollars. The central bank typically invests these dollars in Treasuries, generating a steady return.
What Would Happen If China Sold All of Its Treasuries?
It is improbable that China would liquidate all its U.S. Treasuries at once, as such an action would economically harm China and leave it with dollars that would need to be spent or invested elsewhere.
The immediate consequence would be a rise in interest rates on Treasuries since selling a large amount simultaneously would lead to depressed prices in the bond market, thereby increasing yields. If the Federal Reserve did not respond to this event, it is estimated that long-term Treasury yields would rise by 30 to 60 basis points.
The Bottom Line
Geopolitical dynamics and economic interdependencies often create intriguing situations globally. China’s ongoing acquisition of U.S. debt is one such fascinating development. It raises concerns about the U.S. becoming a debtor nation vulnerable to a creditor nation’s demands. Nevertheless, the situation is not as dire as it may appear, as this financial arrangement can ultimately benefit both countries.