In a recent move, China has divested itself of USD 22.7 billion in US Treasury bills, citing concerns over security and a delay in expected interest rate cuts by the American Federal Reserve. This decision comes amid heightened strategic competition with Washington.
According to figures released by the US Treasury Department and reported by the Hong Kong-based South China Morning Post, China reduced its holdings of US Treasury bills by USD 22.7 billion in February, bringing its total holdings to USD 775 billion by the end of that month. Despite this reduction, China maintains the world's highest foreign exchange reserves, totaling USD 3.2457 trillion as reported by the state-run Xinhua news agency.
Traditionally, US Treasury bills have been China's primary choice for investing its foreign exchange reserves. However, as tensions with Washington have escalated in recent years, Beijing has gradually diversified its reserve holdings.
Zhao Xijun, a finance professor at Renmin University in Beijing, commented on China's shifting investment strategy, stating that while US Treasuries have been a focal point in the past, there is room for further reduction in holdings. Concerns over impending rate cuts in the US, which would impact returns, have influenced Beijing's decision-making.
Economists anticipate a delay in US benchmark rate cuts following remarks from Federal Reserve chairman Jerome Powell, with reductions now expected in September or later. In response to these developments, China has reduced its holdings of US Treasury bills by 25% since early 2021, amounting to USD 280 billion.
Despite efforts by US Treasury Secretary Janet Yellen to address the issue during a recent visit to Beijing, further sell-offs by China remain possible. Alicia Garcia-Herrero, chief economist for Asia-Pacific at Natixis, suggested that China's decision to divest itself of US Treasuries may signal its seriousness about addressing concerns over overcapacity.
While officials from China and the US met to discuss financial stability, regulatory cooperation, and other issues, details of the meeting were not disclosed. Garcia-Herrero pointed out that the combined holdings of Europe and Japan exceed those of China, potentially mitigating the impact of China's sell-off on the US economy.
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