China significantly reduces its holdings of US dollar assets? Not really.
China's reserve assets in US dollars have not reduced holdings of US Treasury bonds, but have leaned more towards non-government debt and equity assets. The total amount of US Treasury bonds held by China may be around $13 to $14 trillion, slightly lower than the pre-pandemic level of around $15 trillion, but not as severe as reflected in the TIC data. In addition, China's major US dollar assets include short-term and long-term US Treasury bonds, corporate bonds and institutional bonds, equities, and deposits, with a total value slightly above $2 trillion since 2018, which matches the trend and accounts for about 60% of China's reserve assets and the value of other foreign currency assets.
The most common US dollar asset in China's reserve assets is the "amount of US Treasury bonds directly held by China in the United States." This number dropped to approximately USD 769.6 billion in October 2023, a decrease of 30.1% from the recent high of USD 1.1 trillion in March 2021, indicating that China has significantly reduced its US dollar assets represented by US Treasury bonds. However, Galaxy Securities found through a more comprehensive observation of China's US dollar asset data that:
-
Not all US Treasury bonds held by China are directly held by US institutions. For the sake of diversified investment and risk diversification, China may also indirectly hold US Treasury bonds through custody services in other countries, such as Euroclear in Brussels and Clearstream in Luxembourg. Galaxy Securities estimates that the total amount of US Treasury bonds held by China may be around USD 13 to 14 trillion, which is slightly lower than the pre-pandemic level of around USD 15 trillion, but not as severe as the TIC data reflects, from USD 11 trillion at the beginning of 2021 to USD 769.6 billion in October 2023.
-
While the amount of US Treasury bonds held by China is slowly declining, the allocation of US dollar assets is more biased towards non-government debt and equity assets: the purchase of relevant debt has been increased, and in 2023, China's holdings of long-term corporate and institutional debt in the US reached USD 270 billion. The value of long-term equity holdings in the US has risen to USD 290 billion.
Overall, China's main US dollar assets include short-term and long-term US Treasury bonds (direct and indirect holdings), corporate and institutional debt, equity, and deposits. The total value has been slightly above USD 2 trillion since 2018, which is in line with the trend of China's reserve assets and the value of other foreign currency assets, accounting for 60% of the total.