China Has Dramatically Reduced Its Holdings of US Debt Since 2013

In November of 2013, China's holdings of United States debt hit an all-time high of $1.317 trillion.

At the time, China seemed to have an unquenchable thirst for United States debt. It was a win-win for both parties - China needed somewhere to park their money, and the United States was borrowing hundreds of billions of dollars every year to continue to fund their operations.

Adjusted for inflation, this works out to $1.77 trillion in today's dollars.

Compare this to current day, when China owns $759 billion of US debt, making them the third-largest holder of US debt in the world.

This is a staggering drop, especially when adjusted for inflation. This means that China only owns 43% of the US debt that it did just 12 years ago.

So why is China scaling back so much?

There are a number of different reasons, including:

1) Sanctions worries. China witnessed a US-led coalition freeze hundreds of billions of dollars in Russian central bank reserves in 2022. China became determined from that point forward to significantly reduce its exposure to US dollar assets. China is clearly concerned that if they are involved in a conflict (namely, Taiwan) that there is a possibility that the United States will move to freeze their assets. By diversifying, this makes it much harder.

2) Reliance on the United States. China has the second largest economy in the world and is constantly butting heads with the USA on the global stage. Why would they want such a significant number of assets being held in US debt? Why would they want to make it easier for the United States to continue to borrow money to fund their deficit spending?

Instead, China has been diversifying into gold, critical minerals such as lithium and infrastructure projects across the world.

3) Stabilizing the Yuan. China intervenes in currency markets to stabilize their own currency, which involves selling US debt, selling the US dollars realized from those sales and then buying the Yuan.

In addition, China has used some of the proceeds from their US debt sales to inject liquidity into their own economy, including the recapitalization of banks and propping up the property sector in the country.

Given the current state of the world, there is little doubt that China will continue to diversify away from the United States in the months and years ahead.



Filed under: General Knowledge