Data shows that China’s holdings of U.S. government debt dropped to 980.8 billion in May, down from about 1 trillion in April. The number has decreased by 100 billion dollars since November.
The lowest U.S. treasury holdings from China was in May 2010, when the U.S. debt level in its holdings was at 843.7 billion.
China had been the top U.S. creditor for many years before Japan took its place in June 2019.
With lower U.S. debt holdings, U.S. government bonds now account for 31.4% in China’s foreign exchange reserves of 3.07 trillion dollars, the lowest percentage since the global financial crisis in 2008.
Experts cite several reasons why China reduces its U.S. debt holdings.
An analyst told the South China Morning Post that China wants to avoid “the risk of possible conflict” with the U.S might be the reason for Beijing to reduce its U.S. treasury holdings below 1 trillion dollars for the first time since May 2010.
Tan Yaling, head of the China Forex Investment Research Institute in Beijing, said, “the large holdings in the past were due to the good bilateral ties, but now China needs to avoid the risk of a possible conflict with the United States.”
Gennadiy Goldberg of New York-based TD Securities told Market Place that China is cutting U.S. bonds to protect its currency, the yuan, as the dollar becomes stronger.
But an expert said that for China, staying away from investing in the U.S. debt is not that easy.
According to Market Place, David Dollar from the Brookings Institution’s China Center said, “The fundamental issue is what do you do with a trillion dollars? There just aren’t a lot of markets into which you can safely put a trillion dollars.”
David Dollar cited politics as the key reason for China to reduce its U.S. debt holdings, saying, “They’re unhappy with the way the U.S. keeps using financial sanctions around the world.”
In 2019 some hawkish China generals suggested dumping the regime’s U.S. treasury holdings to retaliate against hostile actions from the U.S. during President Trump’s presidency. However, experts pointed out that such a move to weaponize U.S. bonds could have little or no impact on the U.S. economy; it hurts China instead.