China Reduces US Treasury Holdings

China reduced its holdings of US Treasury debt for the sixth straight month in January, which analysts said was mainly due to the US Federal Reserve's rate hikes and China's long-term security-driven diversification of its foreign exchange reserves.

The US Department of the Treasury released data on recently showing that China's holdings of US Treasury debt dropped to $859.4 billion in January, declining for the sixth straight month and falling below $1 trillion, where it has been for every month since last April.

China's holding of US government debt is at its lowest since May 2010, when it held $843.7 billion. However, China remains the second-largest non-US holder of US debt after Japan, which held $1.104 trillion as of the end of January.

Source: https://signal.supchina.com

Slashing investments in US Treasuries, which are an important component of China's $3 trillion-plus in foreign reserves, shows the flexibility of Chinese financial institutions' asset allocation and the diversification of investment portfolios, amid higher dollar interest rates and a volatile international environment.

The US has used its financial services as a weapon against Russia amid the Russia-Ukraine conflict to a scale and depth unseen before. Taking it as a lesson, countries around the world have recognized the importance of diversifying their dollar-denominated assets.

China has been promoting the use of the yuan in bilateral trade and investment over recent years. It has become the world's fifth-largest payment currency, third-largest currency in trade settlement and fifth-largest reserve currency.

China's foreign exchange reserves stood at more than $3.13 trillion at the end of February, down $51.3 billion, or 1.61 percent, from the end of January position, according to latest data released by the State Administration of Foreign Exchange.

Why would China do this? It is only logical if the U.S. remains belligerent and wanting a war on Taiwan. The U.S. needs China and Japan to subscribe to its Treasuries and help finance (U.S.’s) trade and services. But with deliberate de-coupling of economies, there is less need to be “financing” trade and services. Hence, the U.S. will have problems with trying to print more Treasuries. In will be an economic sabotage if China were to dump those Treasuries and U.S. fails to pay on due dates!

Reference:

Washington has itself to blame for China’s cut in U.S Treasury holdings: expert, Ma Jingjing, Global Times, 16 March 2023