Macro

China Dumps $53.3B US Debt, Boosts Gold to 4.9% Amid Tensions

China sells a record $53.3 billion in US debt, diversifying into gold amid rising trade tensions and geopolitical risks.

By Barry Stearns

5/16, 06:05 EDT
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Key Takeaway

  • China sold a record $53.3 billion in US Treasuries and agency bonds in Q1, signaling diversification from American assets amid trade tensions.
  • The move comes as President Biden increases tariffs on Chinese imports, with potential for further escalation if Trump is re-elected.
  • Concurrently, China's gold holdings rose to 4.9% of its reserves in April, the highest since 2015, reflecting a shift towards diversifying reserve assets.

China Diversifies Away from US Debt

In a significant move, China has offloaded a record $53.3 billion of US Treasuries and agency bonds in the first quarter of the year. This action is seen as part of Beijing's broader strategy to reduce its reliance on American assets amidst ongoing trade tensions. The sales were highlighted by transactions through Belgium, which is often considered a proxy for China's holdings, where $22 billion of Treasuries were sold during the same period. This shift comes as the global economic giants, the US and China, face renewed strains in their relationship, with the US administration under President Joe Biden ramping up tariffs on Chinese imports, and former President Donald Trump threatening even higher tariffs if re-elected.

Gold Holdings Increase

As China reduces its exposure to US dollar assets, there has been a notable increase in its gold reserves. The proportion of gold in China's official reserves reached 4.9% in April, marking the highest level since 2015 according to the nation's central bank data. This move aligns with a broader trend observed since 2015, where China and its allies have been bolstering their gold reserves, while US-aligned countries have maintained stable levels. Gita Gopinath, the first deputy managing director of the International Monetary Fund, suggested that these gold purchases might be motivated by concerns over potential sanctions, indicating a strategic shift towards more sanction-resistant assets.

Trade Tensions and Diversification

The backdrop to China's divestment from US debt includes escalating trade tensions and the potential for further conflict should the trade war resume, especially with the possibility of Trump's re-election. Stephen Chiu, chief Asia foreign-exchange and rates strategist at Bloomberg Intelligence, interprets China's actions as a clear intent to diversify away from US dollar holdings. This strategy could accelerate if US-China relations deteriorate further, underscoring the geopolitical risks that influence global financial markets.

Street Views

  • Stephen Chiu, Bloomberg Intelligence (Neutral on US Treasuries and agency bonds):

    "As China is selling both despite the fact that we are closer to a Fed rate-cut cycle, there should be a clear intention of diversifying away from US dollar holdings. China’s selling of US securities could speed up as US-China trade war resumes especially if Trump returns as president."