China Slashes US Treasury Holdings to 17-Year Low

Significant Reduction in US Debt Exposure

China has reduced its holdings of US Treasury securities to approximately $688.7 billion in October, marking the lowest level since 2008. This represents a substantial 47% decline from the peak of nearly $1.32 trillion recorded in November 2013. The reduction in US debt holdings has been an ongoing trend since the early tenure of former US President Donald Trump, although the pace has been inconsistent.

Factors Driving the Reduction

Several factors are driving China's decision to decrease its US Treasury holdings:

1. Growing Concerns Over US Debt Sustainability: The recent passage of the One Big Beautiful Bill Act in the US has heightened concerns about the rapid growth of US national debt.
2. Potential Threats to Federal Reserve Independence: Pressure from the White House on the Federal Reserve to lower interest rates has raised concerns about the central bank's independence, potentially impacting the attractiveness of US dollar-denominated assets.
3. Diversification and Risk Mitigation: Yu Yongding, a former advisor to the People's Bank of China, has warned that risks associated with dollar-denominated assets are increasing. He noted that the US economy's dominance is supported by the strength of the dollar (backed by US military power) and strong stock markets driven by technological innovation. The rise of China potentially challenges these pillars.

Implications of the Reduction

This reduction has led to China being surpassed by Japan and the UK to become the third-largest holder of US Treasuries as of March this year. The continued divestment reflects China's strategic shift in managing its foreign exchange reserves and mitigating potential risks associated with US dollar assets. The trend is likely to continue as China navigates its economic relationship with the US amidst growing geopolitical tensions.