China likely to cut more U.S. debt holdings

China may continue to reduce its holdings of United States debt, in a move to diversify its foreign reserve assets and ensure foreign exchange market stability amid the rising de-dollarization trend in international trade, experts said on Aug 16.

Their comments came as the latest data from the U.S. Treasury Department showed that as the second-biggest foreign holder of U.S. Treasury securities, China cut its holdings for three consecutive months to $835.4 billion, as of the end of June, down $11.3 billion from May.

On the contrary, Japan and the United Kingdom — the largest and third-largest foreign holders of U.S. debt, respectively — have both increased their holdings, Japan by $8.8 billion to more than $1.1 trillion and the UK by $11.9 billion to $672.3 billion.

"The proportion of U.S. debt in China's foreign exchange reserves is expected to continue decreasing," said Tang Yao, an associate professor of applied economics at Peking University's Guanghua School of Management.

This is because China needs to advance diversification in foreign reserves as it pursues diversification in foreign trade, Tang said, adding that Japan and the UK increased their U.S. debt holdings due to the prospect of profits.

According to Yang Haiping, a researcher at the Central University of Finance and Economics' Institute of Securities and Futures, de-dollarization is expected to help safeguard international trade and investment if the U.S. continues to abuse the dollar's hegemony status.

Ye Yindan, a researcher at the Bank of China Research Institute, attributed China's reduction in U.S. debt holdings partly to faltering global trust in the greenback amid geopolitical tensions including the Russia-Ukraine conflict.

"Many countries have been diversifying international portfolios, and it is difficult to determine if Japan and the UK will continue to increase their holdings later," Ye said.

However, some experts said that economic conditions are the only reason behind China reducing its U.S. debt holdings. They denied that China's move involved any geopolitical considerations.

Zhang Yansheng, chief researcher at the China Center for International Economic Exchanges, said that China's export slowdown in recent months has already influenced its trade surplus, which will likely prompt foreign exchange authorities to take countermeasures.

Jiang Xianling, executive president of the UIBE &CAITEC International Business Strategy Institute, said that China has been reducing its U.S. debt holdings since the second half of last year as part of broader efforts to maintain stability of the foreign exchange reserve market.

Citing a sluggish external demand and supply challenges due to shutting down of many small businesses and export enterprises during the COVID-19 pandemic, Jiang said that tepid exports will narrow trade surplus this year.

That as well as the expanding U.S.-China interest rate differential and the depreciation of the renminbi are major reasons that China needs to reduce its holdings of U.S. assets, said Jiang, who is also a researcher at the Academy of China Open Economy Studies at the University of International Business and Economics in Beijing.

Ye, the researcher with the BOC institute, said that China accounts for one-fourth of global foreign exchange reserves, and to well manage such a large-scale reserve, ensuring security, liquidity and appreciation of the reserve assets is the country's key goal as it seeks to advance its financial market opening-up amid external turmoil.

China is expected to proactively advance diversification in its reserves and make innovations in the management of the reserves, and continue to be a responsible long-term investor, Ye said.