People walk past the US Treasury Department building in Washington, D.C., the United States, May 21, 2020. (Photo by Ting Shen/Xinhua)

With the US economic recovery remaining fragile due to a voracious resurgence of the coronavirus pandemic, many central banks around the world continued to dump US Treasury bonds, as they are pessimistic about the US economy's performance in the upcoming months. 

Japan, the largest foreign holder of US Treasuries, reduced its holdings for a third straight month to $1.269 trillion in October, according to data from the US Treasury Department. China's holdings of US government bonds extended a downward trend for the fifth consecutive month in October, falling to $1.054 trillion in total, the lowest level since January 2017.

While it is not uncommon to see observers and analysts draw a certain connection between the reduction in China's holdings of US Treasuries and the US-China tensions, it is worth noting that the inclusion of US Treasuries into a country's foreign exchange reserve is more of an investment decision than a political one. It is nothing but misleading to impose geopolitical significance on the normal investment practice of increasing or decreasing the US government debt.

In fact, it is not just China and Japan that are scaling back holdings in US Treasuries. According to the official data, the overall foreign ownership of US government debt declined for a third straight month in October, to $7.068 trillion. The downward trend in foreign holdings underlines central banks' efforts to reduce risk exposure at a time when the US federal deficit and overall debt levels are soaring at a pace rarely seen in history.

The US government debt risk is set to balloon to unprecedentedly elevated levels as the lawmakers are pushing for another big stimulus package to help lift the US economy from a distressful recession. The economy is estimated to drop 4.3 percent in 2020 from 2019, said IMF.

According to the US Congressional Budget Office, the federal budget deficit is projected to hit a record $3.3 trillion for fiscal year 2020, accounting for nearly 16 percent of its GDP and also the largest deficit for the country since 1945. The budget spike in government spending for fighting the pandemic fallout will have to come from issuing more Treasury bonds. 

To make thing worse, the country's debt already stands at a disturbing level. As of Monday, its national debt total reached $27.4 trillion, equivalent to 130 percent of the estimated GDP for 2020. The Federal Reserve will likely step in to offer more liquidity support, but it is increasingly questionable how long it could extend the unlimited quantitative easing policy. 

There is no doubt that the incoming Biden administration will face the daunting task of reviving the US economy, excessive room for fiscal maneuvers is limited. If the US economy fails to show signs of recovery in the short term, then the outside world will feel increasingly pessimistic toward the country's economic prospects, which will be directly reflected in selling more of the dollar-denominated assets. 

Meanwhile, the US still needs more money to stimulate the economy by issuing more government bonds, but flooding the market with liquidity may hurt the dollar's strategic position in the world financial market, further weakening the attractiveness of the dollar assets.

From China's perspective, as the world economy is being reshaped, China must place more emphasis on diversifying its foreign exchange reserve portfolios to reduce risk exposure. The decision to adjust its holdings of US debt will be always based on market conditions, which should not be misinterpreted or politicized. So, selling US bonds should not become a new problem in US-China relations.