China has significantly reduced its holdings of U.S. Treasury bonds, reaching the lowest level since 2008. This strategic shift, occurring over several years, reflects evolving global economic dynamics, concerns about U.S. debt sustainability, and China’s own diversification of its foreign reserves, including a notable increase in gold purchases.
A Decade-Long Trend
China’s divestment from U.S. Treasury bonds is not a recent development but rather a continuation of a trend that began during the first term of the Trump administration. Data indicates a consistent decline, with holdings falling below $1 trillion in April 2022 and continuing their downward trajectory. In 2022, China reduced its holdings by $173.2 billion, followed by $50.8 billion in 2023 and $57.3 billion in 2024.
Diversification and Gold Reserves
Alongside the reduction in U.S. debt, China has been actively diversifying its foreign exchange reserves. Notably, the nation has been increasing its gold holdings for 13 consecutive months. In November, China’s gold reserves grew by 30,000 ounces, bringing its total stock to 74.12 million ounces, valued at $310.6 billion. This move towards gold signals a strategy to hedge against potential economic uncertainties and diversify away from a heavy reliance on U.S. dollar-denominated assets.
Global Context and Other Holders
While China’s holdings have decreased, overall foreign holdings of U.S. Treasury bonds have remained above $9 trillion for an extended period. However, the demand dynamics are shifting. Japan continues to be the largest foreign holder, increasing its holdings to $1.2 trillion in October. The United Kingdom, the second-largest holder, also saw an increase in its holdings to $877.9 billion in the same month. The decrease in demand from major foreign holders like China and Japan, coupled with concerns about inflation and the U.S. fiscal situation, has led to increased market volatility and speculation about the stability of the Treasury market.
Underlying Concerns
Several factors are believed to be contributing to China’s decision to reduce its U.S. Treasury holdings. These include ongoing concerns about the sustainability of U.S. debt, particularly in light of recent legislative actions and discussions surrounding interest rates. Furthermore, escalating trade tensions and tariff wars between the U.S. and China have likely played a role, prompting Beijing to re-evaluate its exposure to U.S. assets. Some analysts suggest that such financial tensions could potentially lead to a broader conflict, impacting both Chinese owners and U.S. issuers.