China has been selling off US Treasury and agency bonds at a record pace in the first quarter of 2023, with $53.3 billion worth of bonds being unloaded, according to Bloomberg. This move is part of China’s larger pivot away from dollar-denominated assets, as the country looks to diversify its reserves and reduce its reliance on the US dollar. This trend started last year as China sought to prop up its weakening yuan against a strengthening dollar.
The selling of US debt by China has escalated in recent years, with an estimated $300 billion worth of US Treasurys being sold between 2021 and mid-2023. This has caused concerns in the markets about the potential impact on yields as China reduces its holdings. The country’s decision to sell off US bonds comes as trade relations between China and the US show no signs of improvement, leading Beijing to reassess its investment strategy.
The recent rally in the US dollar, driven by hawkish monetary policy, has further incentivized China to reduce its exposure to dollar-denominated assets. The US Dollar Index has increased by 4.9% year-to-date, putting pressure on the yuan and making imports more expensive for China. This trend may continue if the US maintains its protectionist policies, leading China to seek alternative assets like gold to diversify its reserves.
In addition to selling off US debt, China is also increasing its purchases of gold, with the metal now accounting for 4.9% of Chinese reserves, the highest level since 2015. This move is part of a broader global trend among central banks to diversify away from the dollar and reduce their reliance on US-dominated financial systems. The fear of US sanctions and the desire to chip away at dollar dominance have motivated this shift in reserve management.
The Biden Administration’s recent announcement of tariffs on Chinese imports, as well as the potential for increased tariffs under a future Trump presidency, have further incentivized China to diversify its reserves. These actions signal a broader de-dollarization trend in global finance, as central banks look for ways to protect themselves from the impact of US economic policies. Overall, China’s strategic investment decisions reflect a growing desire to reduce exposure to the US dollar and enhance the stability of its reserves.
