Trump 2.0: Reducing U.S. debt holdings and increasing gold holdings leads to huge changes in the Chinese government's financial assets
- Chen Yan
- BBC Chinese
Since the trade war began during Trump’s first term, there has been talk of China “weaponizing” its holdings of U.S. Treasuries.
As of October 2024, China's holdings of U.S. Treasuries will further decrease by $11.9 billion to $760.1 billion. This is the lowest level since 2009. In 2013, China's holdings of U.S. Treasuries reached a peak of $1,316.7 billion.
At the same time, the People's Bank of China continued to increase its gold reserves, especially in the second month after Trump's election, when it suddenly began to purchase more gold.
Experts believe that this wave of increase and decrease operations shows that China is preparing for the risks of future strategic confrontation between China and the United States.
Less: U.S. debt holdings are 40% lower than the peak
After China joined the World Trade Organization at the end of 2001, it gradually became a major holder of U.S. bonds.
According to data from the International Capital Flows Report (TIC) released by the U.S. Treasury Department, China's historical highest holdings of U.S. Treasuries occurred in November 2013, when holdings reached US$1.3167 trillion.
Since then, the figure has gradually decreased, but not by much. During the trade war in Trump's first term, China began to continuously reduce its holdings of U.S. debt - in April 2019, its holdings fell to $1,113 billion.
The pace of reduction did not stop in the next five years, but in most months, China sold in small quantities of around several billion US dollars per month. By October 2024, it had dropped to US$760.1 billion, the lowest point in the past 15 years.
Compared to the peak point, China's current holdings of U.S. debt have decreased by more than 40%.
So is this change within the normal range or an extraordinary adjustment?
"It is fair to say that the way China manages its foreign exchange reserves has undergone a paradigm change in the past few years." Xu Tianchen, senior economist at the Economist Intelligence Unit (EIU), told BBC Chinese: During Trump's first term, China was a net seller of U.S. Treasuries, but between 2022 and 2024, this behavior became more aggressive, with an apparent intention to reduce direct exposure to U.S. Treasury market risks.
Xu Tianchen believes that the financial sanctions imposed by the West on Russia since the outbreak of the Ukrainian war may have made China aware of the security of its overseas financial assets.
Another question is, where does China's huge amount of U.S. debt come from?
This reflects the trade deficit between China and the United States to a certain extent. China has had a trade surplus with the United States for many years. China exports goods to the United States and exchanges them for US dollars. It needs to invest these huge amounts of foreign exchange to preserve and increase the value. For China, the US Treasury market is a natural place to store these US dollars.
The U.S. bond market is the world's largest and most liquid bond market, and governments and central banks around the world keep a large portion of their investments in this market.
Not only is this market large enough to accommodate China's massive foreign exchange reserves, but its returns are also higher than other super-safe investments. For example, the current 10-year US Treasury yield is 4.58%, while the 10-year German and Japanese government bond yields are 2.36% and 1.09%, respectively.
As China reduced its holdings, the former largest overseas creditor of U.S. Treasury bonds gave way to Japan (holding $1.1 trillion), which is not much different from the third-placed United Kingdom (holding $716.2 billion).
But in fact, the largest buyers of US bonds are still domestic institutions and individuals. For example, large financial institutions such as banks, insurance companies, and pension funds usually hold a large amount of treasury bonds as part of their asset allocation. The Federal Reserve is also an important holder, holding $2.64 trillion at the end of 2019. During the epidemic, it purchased a large amount of US bonds, reaching $5.4 trillion, and began to gradually reduce it after the epidemic eased. Even so, the scale is still as huge as $4.94 trillion.
Increase: Gold reserves increased by 16.6% in two years
In contrast, China's central bank's gold reserves have been increasing.
The timing of China's central bank buying gold is worth noting: its gold reserves remained unchanged at 1,948 tons in the first ten months of 2022. In November, the month when China's COVID-19 prevention and control restrictions were relaxed, it began to increase its holdings to 1,980 tons, and continued to increase to 2,010 tons in December.
Throughout 2023, the People's Bank of China's gold reserves continued to increase to 2,237 tons; in 2024, it continued to increase to 2,271 tons in December. This is the highest level since 2016.
This means that the People's Bank of China has increased its gold reserves by 16.6% over the past 24 months.
China's actual purchases may be even greater. Some institutions believe that the People's Bank of China is also increasing its reserves through hidden purchases.
Jan Nieuwenhuis, an analyst at Money Metals Exchange, an institution focusing on the precious metals market, believes that the People's Bank of China secretly purchases gold through bullion banks in London, and the gold is usually exported from the UK to China in the form of 400-ounce bars.
According to UK customs data, in May 2024, the People's Bank of China purchased 53 tons of gold, but these transactions are statistically marked as "non-monetary" gold and are therefore not considered direct purchases by the central bank. This strategy allows the People's Bank of China to continue to increase its gold reserves without causing an overreaction in the market.
Xu Tianchen believes that China has been working to diversify its reserve assets since the outbreak of the Russo-Ukrainian war, and increasing its gold reserves is part of this effort.
As for increasing reserves through stealth purchases, Xu Tianchen believes that "it is entirely possible." He said there are two reasons: First, it wants to avoid driving up gold prices in the market, allowing it to increase its gold reserves at a relatively stable rate. Second, it may intend to avoid making its foreign exchange management practices too predictable. In turbulent times, transparency may make the country vulnerable.
Strategic considerations
With one reduction and one increase, two questions emerge: What are the strategic reasons for China to do this? What impact might these actions have on other countries and the global economic landscape?
Xu Tianchen believes this is largely due to China's own security considerations - it must be prepared for the United States to target China's financial sector in a major conflict, a low but not negligible possibility.
Yu Yongding, a member of the Chinese Academy of Social Sciences, said in a public speech that it is necessary for China to reduce its holdings of U.S. debt in an orderly manner. He emphasized that this reduction is not a simple sell-off, but is based on the consideration of the deteriorating U.S. overseas net debt and the risk of "weaponization of the U.S. dollar."
China's reduction of its holdings of U.S. Treasuries also has an impact on the market. Xu Tianchen said that research by econometricians found that when China sells U.S. Treasuries, it will have an impact of several basis points on its yield, especially when the sell-off exceeds market expectations. Therefore, China's behavior poses a certain vulnerability to the U.S. Treasury market.
It is worth noting that China's pace of increasing its gold reserves in the past 24 months has been uneven. It remained static for six months before Trump's election, and then began to increase its gold reserves one month after his election.
Based on this, Vladimir Zernov, a market analyst at the foreign exchange information website FXEmpire, pointed out that the risk of trade conflicts that may be triggered by Trump's election is an important factor in the Chinese central bank's resumption of gold purchases.
He believes that Trump's tough policy has prompted China to adopt an active gold reserve strategy to cope with potential uncertainties and risks.
Xu Tianchen said that although China has reduced its US debt and increased its gold holdings, it still receives a large amount of US dollar income through its current account, and China also uses US dollars to finance loans related to the Belt and Road Initiative, so de-dollarization is impossible for China. What China has done is to spread risks in a covert way, including diversifying investments among different asset classes and managing investments through third-country custodial accounts (such as Belgium and Luxembourg).
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