China’s recorded holdings of Treasuries have fallen below those of the UK for the first time since the start of the century, signaling a shift in Beijing’s management of its foreign reserves. According to data published late on Friday, the value of China’s Treasury holdings as recorded by US banks and custodians dropped to $765bn at the end of March, down from $784bn in the previous month. In contrast, the UK saw its holdings rise by almost $30bn to $779bn, making it the second-largest foreign holder of US Treasuries after Japan.
This development marks the first time the UK’s holdings have surpassed those of China since October 2000, highlighting China’s strategic move towards diversifying away from US assets. “China has been selling slowly but steadily; this is a warning to the US,” said Alicia García-Herrero, chief economist for Asia-Pacific at Natixis. “The warning has been there for years, it’s not sudden — the US should have acted on this well before.”
The data serves as a cautionary sign for the US administration, especially following the recent news that Moody’s has downgraded the world’s largest economy from its triple-A credit rating. Beijing has been gradually reducing its holdings of US treasuries since their peak of over $1.3tn in 2011, opting to diversify into other assets like US agency bonds and gold. Market fluctuations may also have contributed to the decline in the value of China’s holdings.
Analysts believe that China may be holding a growing proportion of its US assets through third-party custodians in countries like Belgium and Luxembourg, which could obscure the true level of its holdings. China’s massive Treasury pile is a result of a long-standing trade surplus with the US, a situation that the current administration is working to address. Concerns have been raised over foreign selling of Treasuries, which can drive up yields and increase debt refinancing costs for the US.
The UK’s rise in recorded Treasury holdings does not directly correlate to its own reserves, but rather reflects London’s role as a hub for international capital. European entities like insurers, banks, and custodians hold Treasury securities, along with some hedge funds engaging in basis trades. The increase in the UK’s holdings is likely due to global banks holding more Treasuries, the availability of custodial services in London, and hedge fund activities.
The data only captures movements until the end of March, meaning it does not reflect any potential actions taken by China in response to Trump’s recent escalation of the trade war. “It is possible that China could have made significant changes in its reserve management in the last six weeks that will only become clear with more time,” said Brad Setser, a senior fellow at the Council on Foreign Relations and former US Treasury official.
In conclusion, the shift in Treasury holdings between China and the UK underscores China’s strategic diversification of its foreign reserves and poses challenges for the US in managing its debt and trade relationships. These developments will continue to shape the global economic landscape in the coming months.
