Instead, it invests in Gold
China has been cutting down its holdings of U S Treasury securities gradually. But where are the China funds going from the US?
China, the second largest non- U S holder of U S Treasuries after Japan, reduced its holdings to the lowest in February 2023. China's holdings fell to $848.8B in February from $859.4B in January. The figure stood at $1.03 trillion at the same time last year. It was the seventh straight month of decline.
In January, the holding stood at $7.4 Trillion; it was $7.7 Trillion in February 2022, according to US Treasury data released in April 2023.
China ratcheted up its US Treasury bond purchases starting in 2000. Its buying spree peaked in 2014, dropping below the magic US$1 trillion mark in April 2022.
China has already trimmed its holdings by 34.1% over the past 10 years, including a 16.6% cut in 2022.
The reasons
China has three reasons for the move:
It needs to diversify its foreign reserves, amid “external risks.” The risk is the trade war between the two countries.
Beijing is wary of the US dollar’s dominance, as it is facing financial sanctions from Washington.
US Treasury yields declined following the US Federal Reserve’s progressive interest rate increases last year. The hikes resulted in a fall in the price of US treasury bonds.
De-dollarizing moves
China is trying to internationalize its currency, the yuan. For instance, the proportion of yuan in Brazil’s international reserves has reached 5.7%, while the Euro is 4.7%. Yuan is now Brazil’s second-largest reserve currency.
Yuan found a place in Brazil’s foreign-exchange reserves four years ago, as its US dollar assets fell to 80.24% at the end of 2022 from 89.93% in 2018.
Russia, which has been kicked out of the US dollar system and SWIFT after the Ukraine invasion, has already increased its holdings of the yuan in foreign-exchange reserves and sovereign funds, with more than two-thirds of bilateral trade settled in yuan or rouble.
Hiding in tax havens
Along with the decline in US Treasuries, China’s Treasury holdings in the tax havens, the Cayman Islands jumped by $38.5B and Bermuda by $7B.
China may be hiding some dollar assets in there, to sidestep Western sanctions
Investing in gold
Beijing is replacing some of its US Treasury holdings with gold. China increased its gold reserves for the sixth consecutive month in April to 1893 tons, growing by about 102 tons, in the face of heightened political risks.
The largest single purchase of gold in February was by the People’s Bank of China, which added 25 tons. It added around 18 tons in March alone.
© Ramachandran
