U.S. Treasury Bonds Interest Rate Cut, Who Got Scythed?
"The U.S. Empire is going to scythe again!" When this message started to be wildly forwarded in various groups, with emoticons accompanying "Destroy it, hurry up," I knew that the Americans had cut interest rates once again.
For seasoned veterans familiar with the financial circle's tricks, this move is all too familiar. Whenever the U.S. economy is sluggish and inflation remains stubbornly high, the Federal Reserve would unleash the big move of interest rate cuts, attempting to stimulate the economy in this way and incidentally harvest a wave of global wealth.
However, the interest rate cut in 2024 has unexpectedly caused a shock in the international community. China, Japan, these once "big customers" of U.S. Treasury bonds, have all sold off U.S. debt, expressing their concerns about the U.S. economic outlook with practical actions.
Is this generation of leeks not easy to scythe? I. Debt Mountain: The U.S. economy, once a beacon admired by the world, is now increasingly resembling a giant in a splendid robe with a towering debt.
Data does not lie. According to data released by the U.S. government, as of 2024, the total amount of U.S. national debt has already broken through the 35 trillion U.S. dollar mark, with a ratio to GDP as high as 121.57%.
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What is this concept? Simply put, it means that the money the U.S. government owes is more than its annual gross national product! What is even more worrying is that the U.S. economic growth is weak, while inflation remains stubbornly high, making the U.S. government's debt repayment ability increasingly questioned. To alleviate debt pressure, the Federal Reserve has no choice but to adopt interest rate cuts, trying to reduce the interest burden of national debt. However, this move seems to have failed in 2024.The market is not optimistic about the prospects of the US economy. Instead of lowering interest rates, the expectation has triggered investors' concerns about the devaluation of the US dollar, leading to a rise in US Treasury yields rather than a decrease.
This is akin to a deadbeat borrower who, in order to take on new debt to repay old debt, has no choice but to lower interest rates, only to find that no one is willing to lend him money. To make matters worse, just as the US economy is in trouble, major holders of US debt like China and Japan have also started to take action. According to statistics, in July 2024 alone, China reduced its holdings of US Treasury bonds by $3.7 billion, and Japan reduced its holdings by $2 billion.
The choices of these countries are undoubtedly a vote of no confidence in the US economy, and they have also led more and more investors to re-examine the risks of US debt. II. Times have changed: The subtle changes in China-US economic relations
For a long time, China has been one of the largest holders of US Treasury bonds. The reasons for this are both political and economic. On the one hand, increasing holdings of US debt was once seen as a way to ease tensions in China-US relations. Against the backdrop of economic globalization, although China and the US have competition, they also need cooperation.
By increasing its holdings of US debt, China can influence US economic decisions to a certain extent and avoid excessive confrontation between the two countries. On the other hand, increasing its holdings of US debt is also to maintain the diversification of China's foreign exchange reserves. For a long time, the US dollar has been the world's main reserve currency, and China's large holdings of US dollar reserves can effectively reduce the risks associated with a single currency.However, with the rapid development of China's economy and the acceleration of the internationalization of the renminbi, China's attitude towards U.S. debt has also gradually changed. First, China began to realize that there are huge risks in over-reliance on U.S. debt. The uncertainty of the U.S. economy, as well as its frequent use of dollar hegemony for harvesting, has made China uneasy.
To safeguard its own economic security, China must reduce its dependence on U.S. debt. Secondly, China is actively promoting the internationalization of the renminbi, hoping that the renminbi can play a more important role in international trade and the financial system.
With the advancement of the internationalization of the renminbi, China will no longer need to hold too much U.S. dollar reserves, which provides room for China to reduce its holdings of U.S. debt. In 2024, China's action of reducing U.S. debt is a rational choice made based on the above considerations. This indicates that China is no longer a country that can be arbitrarily "harvested" by the United States.
China has the confidence and ability to safeguard its own economic interests and contribute to the construction of a more fair and reasonable international economic order. Third, the "tectonic plates" of the global economic pattern are no longer silent: the chain reaction triggered by the United States' interest rate cuts is far more than just between China and the United States.
From a more macro perspective, this event is actually a microcosm of the profound changes occurring in the global economic pattern. The unipolar world once centered on the United States is gradually moving towards multipolarity.The rise of emerging market countries and developing nations is rewriting the global economic landscape.
For a long time, the United States has leveraged the dollar's hegemony to indiscriminately "shear the sheep" worldwide. Through means such as interest rate hikes and cuts, and money printing, the U.S. can easily transfer its own economic risks to other countries, thereby maintaining its position as the economic overlord. However, as the economic strength of emerging market countries and developing nations continues to grow, they are no longer willing to be the "silent lambs." An increasing number of countries are realizing that over-reliance on the dollar system will put their economies in a passive situation. To break free from dependence on the dollar, many countries have begun to take action, promoting the internationalization of their own currencies and strengthening monetary cooperation with other nations.
For instance, China has established a local currency swap mechanism with BRICS countries such as Russia and Brazil to reduce reliance on the dollar.
Furthermore, the process of regional economic integration is also accelerating. For example, ASEAN countries are actively working on the Regional Comprehensive Economic Partnership (RCEP), aiming to establish a more open and inclusive regional trade system and reduce dependence on external economies. These changes indicate that the global economic structure is moving towards a more diversified and multipolar direction. The United States will face increasing challenges if it wants to continue maintaining its economic hegemony.
IV. The Eastern Dragon: China Leading the Future? In the process of reshaping the global economic landscape, China is playing an increasingly important role. As the world's second-largest economy, the stable development of China's economy has injected valuable confidence into the world economy.
China adheres to the basic national policy of opening up to the outside world, actively participates in global economic governance, advocates for the construction of a community with a shared future for mankind, and points the way for the healthy development of the world economy. In dealing with the risks of U.S. debt, China has demonstrated mature wisdom and composure. Instead of choosing to "cut off" and sell all U.S. debt at once, China has adopted a gradual approach to reducing its holdings, which not only protects its own interests but also avoids causing excessive shock to the global financial market.At the same time, China is actively promoting the internationalization of the renminbi. In 2016, the renminbi officially joined the International Monetary Fund (IMF) Special Drawing Rights (SDR) currency basket, marking a significant step in the internationalization of the renminbi.
As the process of renminbi internationalization continues to advance, China's say in international trade and the financial system will be further enhanced.
Of course, China is also keenly aware that its own development still faces many challenges. The issue of unbalanced and insufficient economic development in China remains prominent, and the capacity for scientific and technological innovation still needs to be further improved. China will continue to adhere to the general tone of seeking progress while maintaining stability, deepen reform and opening up, promote high-quality development, and make greater contributions to the prosperity and stability of the world economy.
In summary, the 2024 U.S. interest rate cut event is just the beginning. It indicates that the future global economic landscape will be full of uncertainties. But one thing is certain: China will continue to firmly follow the path of peaceful development, and work with countries around the world to build a better future together.