Ever since the Fed began its rounds of “QE” following the financial crisis of 2008 while the federal government stacked up strings of trillion-dollar deficits, I have been concerned about the status of the dollar. (I even participated in a ZeroHedge tag-team debate on the dollar’s role as the global reserve currency.)
Lately one of my go-to talking points has been the decline of US Treasury holdings by the Chinese. For example, in InFi episode #136, I flashed this table taken from a Congressional Research Service report:
I argued that China had reduced its holdings of Treasuries by about a third in a four-year stretch, presumably because they opposed US foreign policy in recent years and wanted to reduce their vulnerability to the USD financial system and/or increase fiscal pressure on its only global rival.
The Role of Interest Rates
However, when I presented this table on a different podcast discussion, someone in the comments clarified that these data report the Treasury holdings using market values. (I confirmed with one of the authors of the report that yes, Treasuries with more than a year duration are reported at market value, not face value, as explained in this document.) Consequently, the drop in China’s “total holdings” of Treasuries from 2021 to 2025 is at least partly due to the rise in yields on Treasuries during that time:
We would have to know the maturity composition of the original Chinese holdings to make an exact calculation, but just to get a ballpark using the 10yr yield from the chart above: A $1 trillion collection of 10yr bonds with a yield of 1.5 percent (the yield around December 2021) would have a market value of only $783 billion if the yield suddenly jumped to 4.2 percent (the yield around December 2025). (To be clear, this is capturing an instantaneous jump in yields, using a standard bond calculator. I’m not simulating the passage of four years in the portfolio duration.)
Custodian versus Owner
Another wrinkle is that the official Treasury data reflect custodial totals, rather than underlying ownership. Some argue that the apparent reduction in Chinese holdings in recent years is at least partially due to a mere change of custodian from mainland China to Belgium and Luxembourg.
Conclusion
There is little doubt that Chinese officials in recent years have pivoted away from their stockpiling of Treasuries and instead are loading up on gold. However, there are many nuances involved—such as interest rate movements and changes in custody—that make the official Treasury reports possibly misleading. Chinese exposure to Treasuries is definitely lower now than a decade ago, but the drop may not be as severe as the table above indicates.
Dr. Robert P. Murphy is the Chief Economist at infineo, bridging together the dependability of Whole Life insurance policies with the benefits of blockchain-based finance.
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