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China’s recorded holdings of Treasuries have fallen below those of the UK for the first time since the start of the century, underlining an ongoing shift in Beijing’s management of its foreign reserves.
The value of Treasuries held by Chinese investors, as recorded by US banks and custodians, fell to $765bn at the end of March, down from $784bn in the previous month. Those held by UK investors rose almost $30bn to $779bn, according to data published late on Friday.
The crossover makes UK investors the second-largest foreign holders of US Treasuries after Japan. It is the first time UK holdings have been higher than China’s since October 2000 and is the latest sign that Beijing is seeking to diversify gradually away from US assets.
“China has been selling slowly but steadily; this is a warning to the US” said Alicia García-Herrero, chief economist for Asia-Pacific at Natixis. “The warning has been there for years, it’s not sudden — the US should have acted on this well before”.
The data will come as a cautionary sign for the US administration following news that Moody’s has followed Fitch and S&P in stripping the world’s largest economy of its triple-A credit rating, citing its growing debt and deficit.
Beijing has been gradually reducing its official holdings of US treasuries from a peak of more than $1.3tn in 2011, diversifying into other assets including US agency bonds and gold. Some of the fall in the value of China’s holdings could also reflect market moves.
Analysts believe China also holds a growing proportion of its US assets through third party custodians, including Euroclear in Belgium and Clearstream in Luxembourg, which obscures the true level of its holdings. Luxembourg’s Treasury holdings by value were flat in March while Belgium’s increased by $7.4bn from February.
China’s enormous Treasury pile is the result of a multi-decade trade surplus with the US that President Donald Trump is now seeking to reduce. But officials in the US administration have also expressed concern over foreign selling of Treasuries, which pushes yields up and makes debt refinancing more expensive.
The proportion of China’s Treasury holdings that were in short term bills, the most liquid securities that could be most easily sold off in a crunch, in March hit its highest level since 2009.
“Based on the visible data, there is no doubt that China has shortened the maturity of its US portfolio”, said Brad Setser, a senior fellow at the Council on Foreign Relations and former US Treasury official.
The rise of the UK’s recorded holdings does not reflect its own reserves. Rather, analysts say it reflects London’s role as a domicile for international capital.
Holders in Europe include insurers, banks and custodians. Some hedge funds hold Treasury securities and arbitrage by selling futures or swaps — positions known colloquially as “basis trades”.
Setser said the UK number “likely [reflects] an increase in Treasuries held by global banks, the availability of custodial services in London and potentially some of the activity of hedge funds”.
Analysts said that the data, which only shows moves until the end of March, did not reflect any action taken by China after Trump’s so-called “liberation day” escalation of his trade war.
“It is possible that China could have made significant changes in its reserve management in the last six weeks that will only become clear with more time,” said Setser.