China's US debt holdings at lowest in over 12 years

China's cut in US debt holdings reflects an ongoing trend by the world's second-largest economy to diversify its international portfolio and ensure reserve security as dollar asset safety comes into question, market experts said on Friday.

As the second-biggest foreign holder of US debt, China's holdings in US Treasury securities slid for six consecutive months to $859.4 billion as of the end of January, down from $867.1 billion in December, data from the United States Treasury Department showed on Wednesday.

The reduction brought China's holdings of US government debt to the lowest level in more than 12 years, experts said.

They attributed the continuous decline to the fading attractiveness of dollar assets as radical monetary tightening by the US Federal Reserve has pushed down prices of US government bonds and led to rising financial fragility, as seen in the recent failure of Silicon Valley Bank.

"This is an ongoing reduction of China's US treasury portfolio and part of China's reserve management," said Hong Hao, chief economist at GROW Investment Group.

"I wouldn't be surprised to see this trend continuing, as a reflection of weakening US asset safety and its losing performance since last year," Hong said, adding that China is not the only economy that has reduced US debt holdings.

Total foreign holdings of US Treasury securities stood at $7.4 trillion as of the end of January, down from $7.66 trillion a year earlier. Among the top five US debt holders, Belgium and Luxembourg also trimmed holdings in US Treasury securities in January while Japan and the United Kingdom boosted their holdings, according to the US Treasury Department.

Yang Haiping, a researcher at the Central University of Finance and Economics' Institute of Securities and Futures, said holdings reductions by major US creditors, including China, reflect the international community's faltering trust in the greenback.

"Against the backdrop of mounting US government debt and lingering geopolitical tensions, reducing holdings in US Treasurys may become a necessity for China to ensure foreign exchange reserve safety," Yang said.

While trimming holdings in US debt, China has increased holdings in gold with the country's official reserves of the yellow metal standing at 65.92 million ounces as of the end of February, up from 65.12 million ounces in January, said the People's Bank of China, the country's central bank.

Dong Dengxin, director of Wuhan University of Science and Technology's Finance and Securities Institute, said it will be sensible for China to further cut US debt holdings but boost gold reserves to diversify reserve assets, given that the abuse of the dollar in financial sanctions has impaired the greenback's credibility as a reserve currency.

China's foreign exchange reserves — of which investments in US Treasurys are seen as a key component — edged down 1.61 percent from a month earlier to $3.13 trillion by the end of February, official data showed.

China's efforts to ensure reserve safety came as part of the country's sharpened focus on strengthening its financial safety net to safeguard against rising global financial risks.

With SVB's failure due to liquidity stress serving as a red flag, the PBOC said on Friday it will reduce the reserve requirement ratio for financial institutions by 0.25 percentage point on March 27 to keep liquidity in the banking system reasonably ample and support the real economy.

On Thursday, China unveiled a plan to establish a central financial commission to ensure financial stability and promote further development, which experts said will help strengthen financial regulation coordination and prevent major financial risks.