Amid rising geopolitical and tariff tensions, recent headlines have reignited concerns about China dumping U.S. Treasuries, sparking fears of rising yields, volatile bond markets, and diminished global confidence in U.S. debt. These worries stem from the decline in China’s reported holdings, from over $1.3 trillion in 2013 to around $780 billion today. However, the reality behind this trend is more nuanced and less alarming than the headlines suggest.
Selling Treasuries at scale would be self-defeating for China. It would depress Treasury prices, erode the value of its remaining holdings, and result in a stronger yuan against the dollar. This may undermine China’s export competitiveness during a time of moderating growth. Historically, China has been reluctant to weaponize its Treasury holdings. During the 2018–2019 trade war, China responded through currency depreciation rather than Treasury sales. There is little reason to believe the playbook has changed. Moreover, the reported decline in China’s Treasury holdings since 2013 may be partly due to accounting nuances rather than real divestment. Some reserves are held via custodial accounts in countries like Belgium and Luxembourg, appearing under “other countries” in U.S. data. Various estimates put China’s foreign assets closer to $6 trillion, almost twice the official number of $3.2 trillion, with nearly half managed through “shadow reserves” outside the central bank—implying its actual Treasury exposure may be higher than reported.
China has also been gradually reallocating into other USD assets, such as agency bonds and mortgage-backed securities, indicating an allocation shift rather than an exit from dollar-denominated holdings. Additionally, U.S Treasuries remain attractive due to favorable yield differentials, especially against Japan and the Eurozone, and continue to be viewed as the world’s most liquid and trusted risk-free asset, despite concerns over U.S. deficits.
In conclusion, while recent volatility has revived fears of a China-led Treasury selloff, the evidence points elsewhere. The recent weakness more likely reflects basis trade unwinds and rising stagflation risks that could complicate the Fed’s rate-easing path. China’s gradual decline in Treasury holdings aligns with its long-standing strategy of reserve rebalancing, not abrupt liquidation, a move that would ultimately be economically counterproductive. Moreover, with China holding just ~2.8% of the $28 trillion Treasury market, its capacity to trigger systemic disruption is limited. We view the recent Treasury market softness as a potential buying opportunity and maintain a constructive stance on Treasuries within fixed-income allocations.
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