China Subtly Decreases U.S. Treasury Holdings

# China's U.S. Treasury Holdings Drop 27% by Year-End, Signaling Strategic Shifts China's holdings of U.S. Treasury securities have significantly dropped over recent years, indicating a broader shift in the country's foreign exchange strategy influenced by geopolitical and economic factors affecting cross-border investments. # Market Concerns Over China's Impact on Treasury Volatility Last month, U.S. President Donald Trump’s announcement of reciprocal tariffs caused waves in the U.S. Treasury market. This turbulence led some to speculate whether China was contributing to market volatility. While the likelihood of China "weaponizing" its U.S. Treasury holdings is low, analysts suggest that Beijing has gradually reduced its exposure over the years. According to the *Financial Times (FT)*, insiders familiar with China’s foreign exchange regulator—the State Administration of Foreign Exchange (SAFE)—downplayed the chance of an abrupt sell-off of U.S. Treasurys by China. SAFE reportedly sees a sudden, large-scale divestment as impractical, favoring a gradual diversification into short-term securities, gold, and other assets instead. # Gradual Diversification Amid Concerns Over Dollar Dependence China has been methodically reducing its reliance on dollar-denominated assets. SAFE data shows that from 2014 to 2018, around 60% of China’s foreign exchange reserves were dollar-based, a significant portion of which were U.S. Treasurys. Treasurys were preferred for their liquidity, perceived safety, and interest payments. However, SAFE initiated portfolio adjustments as early as 2017, moving away from dollar-dominated reserves. This trend accelerated following Russia’s invasion of Ukraine in 2022 and the subsequent freezing of Moscow’s overseas assets. The *FT* pointed out that rising U.S. inflation in recent years has further diminished the attractiveness of Treasury investments. Meanwhile, concerns about over-reliance on the U.S. dollar have grown within China’s policy circles. # U.S. Treasury Holdings Fall by Over a Quarter U.S. Treasury Department data shows that China’s official holdings of U.S. Treasurys declined by more than 27% from January 2022 to December 2024, falling to $759 billion—equivalent to roughly 1,069 trillion Korean Won. This reduction surpasses the 17% decrease seen between 2015 and 2022, highlighting a more decisive strategy shift. Although China holds additional Treasurys indirectly through intermediaries in Belgium and Luxembourg, the overall trend indicates a deliberate reduction in long-term Treasury investments. # Investments in Alternatives: Mortgages and Infrastructure Assets In place of Treasurys, China has increased its exposure to other U.S. government-backed securities. By early 2020, China’s holdings of bonds issued by agencies such as Fannie Mae had surged by 60% compared to 2018, reaching $261 billion. These bonds, rated similarly to U.S. Treasurys, typically offer slightly higher yields. Moreover, Chinese regulators are reportedly exploring further investments in private equity, commercial real estate, data centers, and infrastructure projects, facilitated through sovereign wealth funds. # Internal Debate Over U.S. Asset Safety Despite these shifts, official statements from China about its foreign reserve management strategy have been limited. However, there's growing skepticism within China regarding the safety of U.S. Treasurys. Researchers at the Chinese Academy of Social Sciences recently expressed diminished confidence, stating, "The era of assuming U.S. Treasurys as inherently safe is over." Yu Yongding, a former monetary policy committee member at the People’s Bank of China, noted that the U.S.-China trade conflict poses serious risks to China’s external assets. He also highlighted potential disruptions from Trump administration policies, including the "Mar-a-Lago Agreement." # Diversification Challenges: Gold and Other Safe Havens Jerlina Zeng, an analyst at CreditSights, suggested that China might increase its gold reserves as part of its risk diversification strategy. She also proposed safe-haven currencies like the Japanese yen and Swiss franc as alternatives, although geopolitical factors might limit reliance on the yen. Despite these efforts, finding viable substitutes to U.S. Treasurys remains a significant challenge for China. The dollar and Treasurys still dominate global financial markets, leaving Beijing in search of balance in its reserve management. As China reconfigures its foreign holdings, global investors and policymakers are closely monitoring whether this gradual decoupling from U.S. Treasurys will reshape long-term flows in international markets.