The Federal Reserve's interest rate cut has attracted global attention.

After the Fed announced the rate cut policy on the 18th,the U.S.Treasury Department released the report on international capital flows for July.

The report showed that the United States' two largest overseas "debt holders," Japan and China,both chose to reduce their holdings,with China reducing its holdings by $3.7 billion,equivalent to more than 26 billion yuan.

Following this news,the U.S.Deputy Secretary of the Treasury will visit China this week.

Why did China and Japan choose to reduce their holdings of U.S.debt?

Is this related to the U.S.Deputy Secretary of the Treasury's visit to China?

Since 1983,the Fed has raised interest rates seven times,and now it is at the end of the seventh rate hike cycle,which started from 0% in March 2020 and has been increased to 5.52% to 5.5%.

Although raising interest rates can alleviate domestic inflation,it also leads to a problem: after the rate hike,one has to bear higher interest payments,and the U.S.also has to repay the interest on its national debt.

As of August 15th of this year,the total amount of U.S.national debt has reached 35 trillion dollars,with an annual interest burden of more than a trillion dollars.

This is undoubtedly a heavy burden on the U.S.government,and more and more American politicians,businessmen,and economists are expressing concern about the U.S.debt problem.

What is the concept of 35 trillion?

It is roughly equivalent to each American carrying a debt of 800,000 yuan.

The continuous surge in U.S.debt is related to the U.S.government's long-term deficit and borrowing to repay old debts,leading to an ever-growing snowball of U.S.debt.

The rampant growth of U.S.debt not only poses a threat to its long-term economic growth potential but also seriously drags down the development of the global economy.

The increasing debt problem is like a "time bomb," posing a hidden danger to the global economy.

Especially in the past two years,the dollar has been in a state of interest rate hikes,with the benchmark interest rate always maintained at a high level of 5.25% to 5.5%.

A large amount of low-interest-rate debt has been directly converted into high-interest-rate debt,further increasing the financial pressure on the United States.

The International Monetary Fund has warned that the high and rising level of U.S.government debt could push up global borrowing costs and undermine global financial stability.

Lowering interest rates can reduce interest expenditure,thereby alleviating the financial pressure on the United States.

Although many data in the United States indicate that it is very necessary to stimulate the economy,this interest rate cut is later than expected,but the magnitude of the cut is still in line with market expectations.

This interest rate cut will not be the only one,and the Fed is very likely to start the next round of interest rate cuts in the future.

Before the interest rate cut,China and Japan successively reduced their holdings of U.S.debt,with the two countries reducing their holdings by nearly 40 billion dollars in July.

Why is that?

Before 2019,China had always been the largest holder of U.S.debt,and after 2019,Japan surpassed China to become the largest holder.

China and Japan are undoubtedly the largest "debt holders" of the United States overseas.

U.S.national debt is a debt security issued by the U.S.government,backed by national credit.

As long as the U.S.economy maintains growth over the years,the U.S.government has the ability to pay interest on time,thus ensuring the safety of investors' funds.

From an investment perspective,U.S.Treasury bonds,with their high safety and stable returns,occupy an important position in the global financial market.

As one of the world's largest foreign exchange reserve countries,China naturally needs to hold a large amount of U.S.debt.

From a trade perspective,as the world's factory,China exports a large amount of goods globally every year,which can bring back a large amount of dollars.

This money can be used to purchase U.S.debt,thus bringing better returns.

During the 2008 financial crisis,China helped the United States cope with the crisis.

At that time,China's manufacturing industry was in a prosperous period and exported a large number of low-priced,practical goods to the United States.

These goods could meet the needs of Americans and also control U.S.inflation.

At the same time,we also purchased a large amount of U.S.debt to stabilize the international financial market.

With the influence of the international community,China has also started to reduce its holdings of U.S.debt in succession.

Starting from April 2022,China began to reduce its holdings of U.S.debt in succession.

By the beginning of 2024,China had reduced its holdings of U.S.debt for three consecutive months,reducing by 18.6 billion,22.7 billion,and 7.6 billion dollars in January,February,and March,respectively.

In April,China increased its holdings of U.S.debt by 3.3 billion for the first time,breaking the previous trend of reduction.

In June,China significantly increased its holdings of U.S.debt by 11.9 billion dollars,setting a record for the largest increase in holdings of U.S.debt this year.

However,in July,China's holdings of U.S.debt decreased by 3.7 billion dollars month-on-month,and the total holding scale dropped to 776.5 billion dollars.

China's decision to increase or reduce its holdings of U.S.debt is determined by multiple factors.

First,it believes that the U.S.economy still has stable growth advantages in the long term,and second,it is a diversified foreign exchange reserve management strategy to diversify risks and seek better investment returns.

No matter what the reasons are,China's increase in holdings will have an important impact on the global financial market.

In addition to China's large-scale reduction,Japan has also chosen to reduce its holdings of U.S.debt.

In May of this year,Japan reduced its holdings of U.S.debt by 22 billion dollars,and then reduced its holdings by 59.5 billion dollars for two consecutive months.

Since June 2019,Japan has always been the largest holder of U.S.debt.

However,under the cycle of the Fed's high interest rates,Japan's large-scale sale of U.S.debt is considered to be for the purpose of maintaining the value of the yen.

Since the first half of this year,the value of the yen has been falling continuously.

To prevent short-selling behavior by the United States and international investment banks,the sale of U.S.debt is also expected.

There are many reasons for reducing the U.S.dollar,and each country will make corresponding adjustments according to its own country.

With the United States' excessive deficit in recent years,the scale of U.S.debt has reached 35 trillion dollars,and the annual military expenditure is close to the trillion level.

Although the United States has raised interest rates several times to cope with inflation,it has been difficult to eliminate.

Continuous interest rate hikes have also affected the economy and formed a vicious cycle.

Naturally,China has seen the potential risks,and reducing holdings of U.S.debt is also to a certain extent to avoid risks.

Reducing holdings of U.S.debt can also avoid the impact of U.S.debt on Chinese assets to a certain extent.

During the epidemic,the U.S.government adopted a quantitative easing policy,borrowing a large amount of money to stimulate economic growth.

However,these phenomena have led to the continuous devaluation of the dollar,which leads to domestic inflation.

To alleviate this phenomenon,the Fed began to continuously raise interest rates,allowing the dollar to quickly flow back to the United States.

After the interest rate hike,the U.S.economy encountered more and more problems.

The Fed's approach not only caused a huge impact on the international financial market but also did not alleviate the living costs of the domestic population.

Over the past four years,the U.S.government's poor management of the interest rate cycle has led to an increase in living costs.

Long-term high interest rates will also lead to higher commodity pricing,and at the same time,the cost of corporate borrowing and mortgage loans will also increase.

The economic downturn has led to problems in corporate operations.

To avoid these problems affecting China's high-quality assets,reduction is also reasonable.

In addition to economic reasons,there is another important reason for China to reduce its holdings of U.S.debt,that is,political factors.

Over the past decade,China-U.S.relations have gone through twists and turns,especially after Trump took office,he launched a trade war and a technology war against China,using means such as raising tariffs and blocking Chinese high-tech companies to contain China's development.

Now,the annual U.S.election is coming again,and Trump is running for president of the United States again.

The impact of future U.S.politicians on China's economy is unknown.

In this case,China holding a large amount of U.S.debt is like a "time bomb."

After the two major overseas "debt holders" of China and Japan successively chose to reduce the amount of U.S.debt,the Fed had to choose to cut interest rates in the face of the precarious situation.

Although the interest rate cut can alleviate the financial difficulties of the United States,this money cannot flow into the pockets of the poor,but instead increases domestic contradictions.

After the interest rate cut was announced,the U.S.Treasury Deputy Secretary for International Affairs,Shang Bo,led a group of U.S.officials to visit China on the 19th and 20th.

The U.S.media said: This planned meeting is the fifth meeting of the China-U.S.economic working group established last year by the deputy ministers of finance of China and the United States.

The members of the working group also include officials of the Federal Reserve and others.

Shang Bo said in a statement before visiting China: "We need a flexible channel to discuss a series of economic issues with Chinese counterparts,which not only involves areas where both sides have consensus but also areas where there are differences."

This visit to China is also to further the economic cooperation between China and the United States in the future.

After all,as major countries,the competitive relationship between China and the United States will affect many countries,so there needs to be an opportunity for mutual communication and understanding.

The United States has such a cooperative attitude to a large extent because of the debt problem.

Faced with the increasingly severe debt problem,they need help from the outside world.

As the world's second-largest economy,if China can help the United States,it can alleviate their debt problem.

For the United States,we need to see whether they are sincere.

We have survived trade wars,technology wars,and U.S.interest rate hikes,so we are not afraid of the United States' "threats."

We hope that the United States can show enough sincerity so that the two countries can smoothly reach a cooperation in the economy.

If the United States is also facing multiple problems,such as the devaluation of the dollar's credit,the debt crisis,and the threat of stagflation,coupled with political infighting,making the U.S.economic situation even worse,this provides an opportunity for China to narrow the gap with the United States.