Why is China Continuing to Sell Its Holdings of U.S. Treasury Bonds?

SadaNews - The U.S. Treasury bond market is the largest mountain of debt in the world, valued at $30 trillion.

This market was built with the help of foreign central banks and investors who rushed to buy U.S. government bonds in both prosperous and turbulent times. But what happens if their appetite wanes?

The Chinese government has been steadily reducing its holdings over the past decade, and although it remains one of the largest foreign holders of U.S. Treasury bonds, its portfolio has shrunk to about half of its peak in 2013, dropping to $683 billion in November, the lowest level since 2008.

Now, Beijing is urging Chinese banks to reduce their own holdings of bonds, and cutting these positions could reduce China's dependence on the U.S., thereby enhancing both financial and national security, especially in times of tension.

However, selling Treasury bonds too quickly could drive the yuan up and undermine China's strong export engine.

What prompted Beijing to issue these directives regarding U.S. Treasury bonds?

Chinese officials have framed the move as an effort to help banks in general reduce concentration risks and limit their exposure to market volatility. But the broader context suggests a strategic goal for Beijing: reducing the country's reliance on U.S. assets amid ongoing tensions over trade relations, technology, and Taiwan.

Policymakers are mindful of the precedent set in 2022 when the U.S. and its allies froze about $300 billion of Russia's central bank reserves following its invasion of Ukraine. The concern is that if tensions escalate, the U.S. could restrict access, in an extreme scenario, to dollar-denominated assets owned by the Chinese state or private sector.

Does the step have downsides for China?

The Chinese government has bolstered its gold reserves over the past decade, sharply accelerating its purchases in 2025, making it one of the largest official holders of the metal in the world. However, beyond gold, China has few practical alternatives for investing about $3.4 trillion of its foreign exchange reserves, the largest in the world, facing a similar dilemma with its local banks.

For instance, other sovereign bond markets, like those in Europe and Japan, are sizable, but they lack the depth and liquidity of the U.S. Treasury bond market. Since countries like Germany, France, and Japan are U.S. allies, they are likely to coordinate with Washington and impose similar sanctions if the U.S. froze China's holdings. Other markets, such as stocks or real estate, either entail high risks or lack sufficient liquidity.

Moreover, there could be potential repercussions for the Chinese economy and its balance sheet. A rapid and extensive sale is likely to lead to falling Treasury bond prices and rising U.S. yields, which could in turn pressure the U.S. dollar. A weaker dollar would make U.S. exports more competitive while simultaneously reducing demand for Chinese goods — particularly in light of tariffs imposed by former President Donald Trump. A declining dollar would also lower the value of dollar-denominated assets that China still holds.

Finally, a clear move away from Treasury bonds could provoke a retaliatory response from the U.S., undermining the financial stability that China seeks to maintain.

The initial decline in Treasury bond prices following Beijing's call for banks to reduce their holdings was limited and short-lived, indicating that investors see limited fallout on the market and do not expect a sharp deterioration in U.S.-China relations as a result.

However, a more acute shift could be problematic. If China were to completely halt its purchases, or in an extreme scenario sell large quantities of bonds, that would pressure prices and drive yields up. This would increase borrowing costs across the U.S. economy, including mortgage rates, corporate loans, and government financing.

A broad wave of selling could also prompt other countries to follow suit, which could weaken the dollar's status as a global safe haven. Nevertheless, many consider a complete divestment from bonds an unlikely prospect.

Why does China hold so much U.S. debt in the first place?

China's massive stock of U.S. debt is not just an investment choice but is largely a result of its export-led economy. Due to the low cost of its products, the Asian country has sold goods to the United States— such as toys, clothing, and electronics— for far more than it has bought from it. These trade surpluses have generated a continuous flow of dollars.

Chinese exporters cannot use dollars directly to pay wages or expand their businesses within the country. Although they can theoretically convert dollars to yuan through the banking system, many prefer to keep their dollar revenues abroad and invest them in foreign securities, while paying workers in yuan revenues, as this is more financially viable.

For the central bank, maintaining a large reserve of Treasury bonds also serves a strategic purpose, as it gives the People's Bank of China a strong intervention capability during crises, allowing it to support the yuan and stabilize local markets by liquidating some of its reserves when necessary, as occurred after the sudden currency depreciation in 2015.

Are other countries or institutions selling U.S. Treasury bonds?

The Danish pension fund "Akademiker Pension", which manages assets worth $25 billion, stated in January, following former President Donald Trump's threat to buy Greenland, that it would sell about $100 million of Treasury bonds it held. Dutch pension fund "Stichting Pensioenfonds ABP" also reported that it reduced its exposure to U.S. government bonds, cutting its holdings by about €10 billion to €19 billion over the six months leading up to September.

Outside of Europe, India's holdings have fallen to a five-year low as authorities moved to support the rupee and diversify their reserves. Brazil has also cut its long-term holdings of U.S. Treasury bonds.

In contrast, both Japan, the United Kingdom, and Canada have increased their holdings of U.S. Treasury bonds during the year leading up to November 2025, according to official data.

Overall, foreign holdings of Treasury bonds reached a record high of $9.4 trillion in November, but foreign investors now represent a smaller share of the total debt market compared to before, amid the rapid growth of U.S. government borrowing. Foreign investors currently hold about 31% of Treasury bonds, down from about 50% at the start of 2015.