"Chinese authorities advise banks to curb excessive U.S. Treasury holdings"

"Warning over risks from volatility and concentration"

"China has been cutting U.S. Treasuries, but holdings may have shifted to European custodians"

Foreign holdings of U.S. Treasuries hit a record high at end-2023

Chinese authorities have advised financial institutions to reduce their holdings of U.S. government bonds. On the news, U.S. Treasury prices fell (i.e., yields rose) and the dollar also weakened. Stocks, gold and cryptocurrencies, after more than a week of sharp swings, posted modest gains.

According to Bloomberg, citing sources on the 9th (local time), Chinese regulators recently warned of risks stemming from volatility and concentration and instructed banks with large allocations to U.S. Treasuries to cut their positions. The guidance does not apply to U.S. Treasuries held by the Chinese government.

Following the report, the 10-year U.S. Treasury yield rose 3 basis points (1bp=0.01%) to 4.23%. The ICE Dollar Index, which measures the greenback against six major currencies, fell 0.3% to 97.331, extending losses for a second day.

Sources said the guidance was delivered verbally in recent weeks to several of China’s largest banks, reflecting concerns that sizable Treasury holdings could expose them to abrupt market moves. Bloomberg said the move comes as other governments and fund managers question the safe-haven status of U.S. Treasuries and the dollar.

The sources added that the measure is aimed at diversifying market risk rather than pursuing a geopolitical strategy, and that no specific size or timing was provided.

Last week, U.S. President Donald Trump and Chinese President Xi Jinping held a phone call and are expected to meet at a summit in Beijing as early as April. According to the sources, the Treasury-related guidance for Chinese banks came before the call with Trump.

Data from China’s State Administration of Foreign Exchange show that as of September, Chinese banks held about $298 billion (about 437 trillion won) in dollar-denominated bonds. How much of that is in U.S. Treasuries is unknown.

Last month, a Deutsche Bank analyst warned that European asset managers could cut U.S. assets in response to Trump’s tariff threats and his attempt to acquire Greenland. Global investors’ confidence in U.S. assets has been eroded by uncertainty over the Trump administration’s fiscal controls and concerns about preserving the Federal Reserve’s independence.

Trump said in late January he was satisfied with the dollar’s recent decline, which helped push it to its lowest level since early 2022. Lower interest rates and concerns about rising fiscal risks also weighed on the dollar.

There was a brief bout of selling after Trump’s tariff announcement in April, but U.S. Treasuries have outperformed other developed-market sovereign bonds since the Fed’s rate cuts last year.

Some investors have referred to a “quiet selloff” in Treasuries, but there are still few signs of panic. Bloomberg said a Treasury volatility gauge has fallen to a five-year low.

U.S. Treasury data show foreign holdings of U.S. Treasuries hit a record $9.4 trillion in November.

China’s Treasury holdings have steadily declined over the past decade. Once the world’s largest holder of U.S. debt, China slipped behind Japan in 2019 and behind the United Kingdom last year to rank third. Its holdings have nearly halved since peaking in 2013, falling to $683 billion in November last year.

Jeff Yu, chief macro strategist at BNY, said, “For now, there is no credible alternative as a global reserve asset.” He added, “Based on the data we have, 72% of global sovereign bond allocations are U.S. Treasuries, while the euro zone accounts for just 11%. There is no comparison.”

Some analysts believe the actual decline may be smaller because China may have moved part of its holdings to custody accounts in Europe. Belgium, which market analysts say holds assets including those in Chinese custody accounts, has quadrupled its U.S. Treasury holdings since the end of 2017 to $481 billion.

Kim Jung-a, contributing reporter kja@hankyung.com