China Buying Gold and Dumping US Treasuries

As China accumulates more gold, it is simultaneously reducing its holdings of U.S. Treasuries.

According to the latest data from the Federal Reserve, China sold another $22.7 billion in U.S. Treasuries in February, bringing its total holdings down to $775 billion. Despite this reduction, China remains the second-largest foreign holder of U.S. debt. However, if the current trend persists, the U.K. might soon overtake China for the second position.

Japan holds the largest amount of U.S. Treasuries, with $1.17 trillion, while the U.K. ranks third with $700.8 billion.

China has been reducing its U.S. debt holdings for several years, with its Treasury holdings falling from around $1.1 trillion in 2021 to their current level. Chinese investment in U.S. debt reached a 14-year low in October.

China is deliberately reducing its exposure to the dollar. Chinese policymakers have observed how the U.S. leverages the dollar as a foreign policy tool. Recently, Janet Yellen suggested seizing Russia’s frozen dollar-denominated assets and giving them to Ukraine. The Chinese are aware that the U.S. could exert similar pressure on them. To mitigate this vulnerability, they are strategically withdrawing from the dollar system.

As a part of this strategy, China is stockpiling gold, which is a reserve asset free from counterparty risk. The People’s Bank of China has added gold to its reserves for 16 consecutive months, accumulating over 300 tons since it resumed reporting gold purchases in October 2022. Furthermore, China may hold more gold than it officially reports. Analysts, including Jim Rickards, suggest that China maintains several thousand tons of gold "off the books" in an entity called the State Administration for Foreign Exchange (SAFE).



Sources: Bloomberg & FXStreet

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