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China continues to reduce holdings of US Treasury debt for six consecutive months

In September, China continued its six-month streak of cutting its holdings of US Treasury debt, according to data from the US Treasury. As America’s second-largest foreign creditor, following Japan, China reduced its holdings of US Treasury securities to $778.1 billion, marking a $27.3 billion decrease from the previous month. This September figure represents the lowest level of China’s holdings since June 2009 when it held $776.4 billion in US Treasury securities.

This decline coincides with the US issuing hundreds of billions of dollars in new debt to finance a budget deficit that surged from $320 billion in 2021-22 to $1.7 trillion in the year leading up to September. Projections indicate that the deficit will continue to rise to $1.85 trillion in the current financial year.

Typically, major creditors would increase their purchases of bonds as the amount sold to finance the deficit rises. China’s reduction in holdings raises concerns about its efforts to ‘de-dollarize’ by diminishing the significance of the US dollar in its economy.

In recent years, China has invested tens of billions of dollars in gold, but this is insufficient to offset the decline in US Treasury holdings. Economists suggest that China may be reallocating its holdings to well-known tax havens such as Ireland, Switzerland, the Cayman Islands, and Luxembourg.

However, a more plausible explanation is that China is cashing in some of its bonds to support the value of the yuan, which has depreciated by just under 5% against the US dollar this year.

China’s holdings have remained below $1 trillion since April of the previous year, and the $778.1 billion figure in September is the first in 14 years to be lower than $800 billion. In September 2022, China held $901.7 billion, indicating a decline of more than $120 billion or over 13% in the following year.

China reduced its holdings for seven consecutive months until February, briefly increasing them in March, before resuming reductions.

In September, Japan also decreased its holdings by $28.5 billion, bringing them to approximately $1.09 trillion, marking the largest reduction in a single month since April. Japan had also reduced its holdings by around $28 billion since September 2022.

The United Kingdom, the third-largest foreign holder of US debt, slashed its holdings by $29.2 billion in September, leaving it at $668.9 billion. However, its holdings increased by $4 billion over the year leading up to September.

Notable increases in holdings were reported from Ireland (up by $30 billion), Luxembourg (up by $74 billion), and Canada (up by $80 billion).

US analysts note that the proportion of US dollars in China’s total reserves, which stand at around $3.2 trillion, remains approximately 50%, a consistent level over the years.

Berkshire Hathaway, the company controlled by Warren Buffett, emerged as a significant private buyer of US Treasuries in the year leading up to September, increasing its holdings from approximately $77 billion in 2022 to around $127 billion by the end of the September 2023 quarter.

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