China has been selling billions of dollars’ worth of U.S. Treasury securities and equities, attracting attention as other countries increase their American asset holdings. According to data from the Treasury Department, foreign holdings of U.S. Treasury securities reached their highest level since December 2021. However, China stands out as it continues to dump U.S. assets in large amounts.
Total holdings of U.S. debt rose by nearly 3 percent year-over-year to $7.707 trillion, surpassing July’s total of $7.655 trillion. China reduced its holdings by more than $16 billion to $805.4 billion, a decrease of approximately 15 percent compared to the previous year and the lowest level since 2009. Chinese investors also offloaded around $5.1 billion in U.S. stocks in August, marking a record high.
While Japan remains the largest foreign holder of U.S. Treasurys, with investors in Tokyo increasing their stakes by about $4 billion to $1.116 trillion, other notable countries that boosted their holdings include the United Kingdom ($36 billion), Canada ($1.2 billion), and Saudi Arabia ($3 billion). On the other hand, countries such as Belgium ($2 billion), Switzerland ($18 billion), Taiwan ($2 billion), and India ($600 million) trimmed their holdings.
Market observers suggest that China is selling its U.S. debt and equity holdings to support the Chinese yuan for intervention purposes. As the value of the yuan weakens against the U.S. dollar, China sells dollar-denominated assets and uses the returns to purchase yuan. Some experts also believe that Beijing is trying to rein in its finances during below-trend growth by using government resources to support the economy.
China’s gradual divestment of U.S. assets has been referred to as “the long goodbye” by economists. Its holdings, which peaked above $1.3 trillion in late 2013, have decreased by about $500 billion (nearly 40 percent) in the past 10 years. Diversification is an important aspect of China’s strategy, as U.S. government debt now represents only about one-quarter of its total foreign exchange reserves, compared to 59 percent a decade ago. China has been stockpiling various assets, including gold, crude oil, and euros.
Diminishing investor demand for U.S. bonds has been observed in recent Treasury auctions, likely due to concerns about Washington’s fiscal path and the flooding of capital markets with bonds. The Treasury has issued $1 trillion in bonds in the third quarter, with another $850 billion expected. The national debt has exceeded $33.55 trillion, and the federal deficit is nearing $2 trillion. However, a recent 20-year Treasury auction showed robust demand, providing some respite in the selloff of longer-term Treasury securities.
Federal Reserve Chair Jerome Powell’s comments have influenced investor sentiment. Powell stated that monetary policy is not too restrictive and left the door open for further tightening if growth and inflation do not moderate. He also mentioned that a sustainable return to the Fed’s 2 percent inflation goal may require below-trend growth and softening labor market conditions. The Fed has not indicated a potential revival of its bond-buying program and is currently reducing its balance sheet, which reached a record high of $8.9 trillion during the pandemic.
It remains uncertain when the Fed will return its balance sheet to pre-pandemic levels, but it has offloaded $1 trillion in the last year. As a result, it is unlikely that the institution will resume purchasing Treasury securities in the near future.