After the Federal Reserve announced an interest rate cut, will $1 trillion flow back to China?

At a critical moment, China has sold another $3.7 billion in U.S. Treasuries.

So, what impact will the Fed's decision to cut interest rates have on China?

What signal does China's decision to sell more U.S. Treasuries send to the outside world?

On September 18th local time, the Federal Reserve concluded an aggressive interest rate hike cycle that lasted for 11 rounds, making a decision to cut interest rates by 50 basis points, lowering the target range of the federal funds rate from 5.25% to 5.5% to 4.75% to 5%.

Federal Reserve Chairman Powell stated that this significant rate cut is a "timely" and "strong action" because the domestic inflation situation in the United States has "significantly eased," and the job market has begun to show signs of weakness, with the Federal Reserve facing pressure to shift policies.

Although the grim reality of the surge in U.S. debt determines that the Federal Reserve cannot maintain high interest rates for a long time, a "big move" like a one-time cut of 50 basis points still exceeds outside expectations.

The New York Times believes that the Federal Reserve, which firmly believes that the risk of inflation has diminished, is likely to cut interest rates by another 50 basis points before the end of this year to stimulate the domestic employment situation in the United States and prevent the unemployment rate from rising further.

For the international market, the impact of the Federal Reserve's interest rate cut is also not to be underestimated.

The market expects that after the Federal Reserve starts a continuous interest rate cut cycle, it is expected to further alleviate the foreign exchange outflow pressure on the renminbi exchange rate formed by the interest rate differential, and open up domestic monetary policy space.

At that time, Chinese companies may choose to sell up to $1 trillion in U.S. dollar-denominated assets, pushing the renminbi exchange rate against the U.S. dollar to rise significantly.

Of course, the Fed's interest rate cut also has its downsides.

Some experts point out that due to the long-term interest rate hike cycle, asset prices in various countries have fallen sharply.

After the rate cut, U.S. funds just happen to "bottom fish" everywhere, so after the Federal Reserve starts the interest rate cut cycle, some countries may also face the plight of significant devaluation of their own currencies and asset price collapses.

Fortunately, China is not unprepared for this "trick" of the United States.

The latest report on international capital flows published by the U.S. Department of the Treasury in July 2024 shows that the scale of foreign investors holding U.S. Treasuries set a historical record high in July, but the two largest overseas "debt holders" of the United States - China and Japan - both chose to reduce their holdings.

Among them, China's holdings decreased by $3.7 billion compared to the previous month, and the total holdings fell to $776.5 billion.

From the data, although China significantly increased its holdings of U.S. Treasuries by $11.9 billion in June this year, the overall trend of reducing holdings has not changed.

So far this year, the People's Bank of China has reduced the total amount of U.S. Treasuries by $39.8 billion.

Some analysts believe that reducing U.S. Treasuries is both the objective need for the diversification of foreign exchange reserve assets of China's central bank and the inevitable choice made by China under the falling U.S. dollar index and the risk of U.S. Treasuries blowing up.

After all, after the outbreak of the Russia-Ukraine conflict, the overseas assets of the Russian central bank were frozen, and there have been voices in the United States freezing Chinese assets.

China must also "be prepared for a rainy day" to avoid Washington using the U.S. dollar as a "weapon" against China.

In recent years, China has accelerated the settlement mode of local currency in bilateral trade and accelerated the process of "de-dollarization," for the same consideration - to enhance the influence of the renminbi while avoiding being "manipulated" by the U.S. dollar in China's economy.

Some analysts point out that under the Federal Reserve's protracted interest rate hike offensive, China has been able to maintain a low-interest policy, while relying on its substantial foreign exchange reserves and internal circulation capabilities, maintaining a 5% GDP growth rate, proving that the U.S. government's plan to "mow the leeks" from China has failed.

On the contrary, the U.S. government, which has "high-profile" opened the prelude to interest rate cuts, whether it can solve the huge budget deficit problem and reduce the living costs of ordinary people, still needs to be questioned.

It should be noted that the inflation crisis in American society has not completely disappeared, and a significant interest rate cut may lead to a resurgence of inflation.

At that time, the federal government will inevitably face public opinion pressure from all walks of life in the country.