Amid escalating tensions between the United States and China, recent data from the U.S. Department of the Treasury reveals that China has engaged in a significant fire sale of U.S. treasuries, offloading over $53 billion worth of agency bonds and Treasuries in the first quarter of 2024. Belgium, a key custodian of Chinese holdings, also sold $22 billion in Treasuries during the same period.
The move by China to divest such a substantial amount of U.S. securities has caught the attention of investors, particularly in light of the heightened trade tensions between the two global economic powerhouses. President Biden has announced plans to increase tariffs on Chinese imports, while former President Trump is considering imposing tariffs of up to 60 percent on goods from China if he were to win the upcoming election.
According to Bloomberg Intelligence’s Stephen Chiu, China’s decision to sell off U.S. securities, despite the Federal Reserve leaning towards a rate-cut cycle, indicates a clear intention to diversify away from U.S. dollar holdings. Chiu suggested that China’s selling of U.S. securities could accelerate as the trade war between the U.S. and China reignites, especially if Trump secures another term in office.
In addition to reducing its U.S. dollar assets, China is also increasing the percentage of gold in its reserves, reaching a 4.9% share last month, the highest level in almost a decade. Some analysts speculate that China may hold a significant amount of gold beyond what is officially reported, possibly storing thousands of tons of gold in a separate entity off the books.
China is not the only country escalating its gold reserves. Other nations with ties to China are also increasing their gold holdings as a response to the risk of sanctions amid rising geopolitical tensions. LaDuc Trading Macro Adviser Craig Shapiro noted that the handling of Russian reserves and growing American fiscal deficits could be driving China’s diversification efforts.
As China and other BRICS nations pursue dedollarization, aiming to reduce their reliance on the dollar to manage financial risks, the global economic landscape continues to shift. Bridgewater Associates CEO Ray Dalio highlighted the effectiveness of sanctions involving freezing assets like U.S. Treasury bonds, prompting countries to reconsider transacting directly instead of through the U.S. dollar.
In conclusion, China’s decision to sell off a substantial amount of U.S. treasuries reflects a broader trend of dedollarization among countries seeking to mitigate financial risks and shield themselves from potential sanctions. The shifting dynamics in the global financial system underscore the need for diversified reserves and alternative strategies in an increasingly uncertain geopolitical climate.
