China’s Treasury trim signals balance-sheet cleanup, not a break

It may sound like a geopolitical warning shot, but China’s latest directive to curb US debt holdings is better read as a risk-management exercise. Officials in Beijing have recently issued a verbal directive to major banks to limit purchases of US government bonds and trim existing holdings to reduce concentration risk, Bloomberg reports. While the headlines echo past trade-war fears of coordinated “dump the USD,” insiders and economists say the move reflects balance-sheet housekeeping rather than geopolitical escalation.

This is likely a cleanup operation, not a strategic exit, Council on Foreign Relations Senior Fellow Brad Setser told Axios. Over the past two months, Chinese exporters sold roughly USD 100 bn per month to state-owned banks, which in turn parked much of that inflow in US Treasuries, creating a lopsided risk profile that Chinese regulators are now seeking to rebalance, Setser noted.

The move was framed around diversification rather than concerns over US creditworthiness, helping explain the muted market reaction. Treasury yields ticked slightly higher, but volatility measures are setting near five-year lows, signaling limited investor alarm.

While commercial banks clean up their books, longer-term data point to a broader shift in who holds America’s debt. China’s official Treasury holdings have fallen to USD 683 bn — their lowest level since 2008 — dropping the country to third place behind Japan and the UK.

But analysts say that this does not amount to a full retreat. Holdings in custodial accounts in Belgium — often seen as a proxy for Chinese holdings — have quadrupled since 2017 to USD 481 bn. At the same time, total foreign holdings of US treasuries climbed to a record USD 9.4 bn in November, underscoring continued global demand for USD assets.

The diplomatic backdrop reinforces the view that the financial directive is not a signal of escalating hostilities. US Treasury staff were in China last week to strengthen communication channels ahead of a planned meeting between US Treasury Secretary Scott Bessent and Chinese Vice Premier He Lifeng, Reuters reports. Those talks are setting the stage for a potential summit between Donald Trump and Xi Jinping in Beijing as early as April.

MARKETS THIS MORNING

Markets this morning were reacting to US retail sales figures, which came in lower than expected. Meanwhile, Asia-Pacific markets appeared to be nearing the end of their almost-weeklong rally triggered by Japan’s election, posting softer gains in early trading this morning. The Nikkei was closed today as Japan celebrates National Foundation Day.

The values in the table above are listed according to the market position as of 3:30pm IST / 2pm GST.