China balances dollar shift, backs stability

While China is poised to gradually diversify its foreign exchange reserves away from US dollar assets in line with shifts in trade structure, the country remains committed to safeguarding global financial resilience — with the stability of the US Treasury market serving as a key pillar, economists and financial experts said.

They made the remarks as China's approach to its massive holdings of US debt — a delicate topic with implications for global markets — could surface at the negotiating table as the world's two largest economies agreed to continue talks on economic and trade relations.

"One of the key expectations from the US side may be for China to maintain a stable level of US Treasury holdings and to refrain from large-scale sell-offs over a short term," said Yang Weiyong, an associate professor at the University of International Business and Economics.

While China could, in theory, use its holdings as a strategic deterrent, decisions on whether to increase or reduce its holdings are primarily driven by market-based considerations — such as US Treasury yields and expectations for future price movements, Yang said.

"China is a major holder of US debt, so we too want the market to remain stable. That stability benefits the global economy, especially considering that $8.8 trillion in US Treasury securities are held by foreign governments and institutions."

As the second-largest US creditor nation after Japan, China held $784.3 billion in US Treasury securities as of the end of February, up from $760.8 billion from a month earlier, data from the US Department of the Treasury showed.

Since April, concerns have mounted in Washington over whether major foreign holders of US debt — such as China and Japan — might reduce their holdings amid heightened trade tensions.

Even as tensions have eased as China and the US announced on Monday that they will drastically roll back tariffs on each other, the issue remains unresolved. With the US government edging closer to a potential bond default, continued support from major creditors is seen as vital to rolling over its debt.

Last week, US Treasury Secretary Scott Bessent urged Congress to raise or suspend the federal debt ceiling by mid-July, warning that failure to act could leave the US government unable to meet its obligations as early as August.

Yang said he does not believe China has any intention of using the sale of US debt as a retaliatory measure against Washington — at least for now — as the country aims to contain bilateral economic disputes within the trading sphere to avoid broader frictions.

Still, holdings of US Treasury securities would be one of the bargaining chips in China's favor, said Hong Hao, a renowned economist.

Hong added that China is in the process of diversifying reserve holdings in the long run, with gold as an apparent choice.

"Other than gold, China is developing trade relationships with other countries and thus the reserve holdings must reflect the newly formed trade relationships," he added.

Zou Lan, deputy governor of the People's Bank of China, the country's central bank, said in late April that China has achieved "effective diversification" of its foreign exchange reserve portfolio, guided by market-oriented and professional investment principles.

China's foreign exchange reserves totaled $3.2817 trillion at the end of April, up by $41 billion, or 1.27 percent, from March, while the country's official gold reserves came in at 73.77 million ounces, up from 73.7 million ounces a month earlier, marking the sixth consecutive month of increases, the State Administration of Foreign Exchange said.