China Continues to Offload US Treasuries

China has been offloading its US Treasury holdings for years. Once the top holder of US debt, China cut its US Treasury holdings for the third consecutive month this May. Total holdings have fallen to $756.3 billion from $757.2 billion in April, according to the US Treasury, marking the lowest debt held since May 2009.

As of 2024, China has reduced its holdings by approximately 30% over a four-year period. China was able to use the exchange rate to buy yuan when the currency depreciated. China seemed to be assisting Trump years ago in lowering the dollar to ease trade frictions. That is no longer the case here as the United States began engaging in economic warfare when it pushed Russia off SWIFT, implemented sanctions, and confiscated private assets. Politicians have threatened China with economic warfare over Taiwan, and there is no incentive to hold the debt of your political enemy. It is akin to holding a gun to someone and asking them to lend you money with the promise to pay it back.

In 2013, China held $1.317 trillion in US Treasury securities at its peak holding. Geopolitical rivalry followed as China increased its military presence in the South China Sea and the US responded by forming alliances with neighboring Asian nations and conducting military operations near Taiwan. Former President Obama and Xi Jinping met in 2013 as well amid ongoing conflict regarding arms sales to Taiwan, cyber espionage accusations, and disagreements over North Korea. China offloaded $550 billion in US Treasuries by the end of 2013 and Japan became the largest holder of US debt.

Let us not forget that the Ukraine war sprang up in 2014, and the West installed its puppet government. China observed and responded accordingly. Tensions heightened in 2015 when China continued to assert its dominance in the South China Sea. The US refused to accept the One China policy, despite desperately needing China to remain an ally. Trump’s first term marked ongoing trade wars between the US and China that turned into outright hostility. The Hong Kong protests of 2019 further strengthened ties as the US aligned itself with Hong Kong and once again dismissed the One China policy.

By 2020, China was akin to Russia in terms of being the “communist” enemy of the West. Mike Pompeo delivered a speech in which he declared the end of an era of engagement with China due to intellectual property theft, territorial claims, and human rights abuses. Both Trump and Biden blacklisted Chinese companies and spoke of an ongoing need to distance the US from China rather than form a concrete alliance with its top trading partner.

By 2022, we had Nancy Pelosi and other top politicians visiting Taiwan to show their support for sovereignty. The US vowed to intervene if China attempted to reclaim its territories. Three years ago, the Chinese government warned the provinces and private companies not to borrow dollars. The people and institutions were free to do as they pleased, despite China being deemed an evil communist nation by the West.

All of this was a political farce as the West is selective about which nations it wants to be the moral police over. China will never have the incentive to take on more debt of an enemy nation. The Fed desperately needed China’s participation as its plan was to roll over its debts perpetually, but that is now out of the question. Japan is facing a massive crisis and will be the first to default. What will the US do when no one is willing to buy its debt?