DOLLAR DEMISE: China selling U.S. Treasury bonds in record numbers in favor of gold, other commodities

05/24/2024 / By Richard Brown

China sold a record number of U.S. Treasury bonds in the first quarter of this year, marking a significant shift away from dollar assets in favor of other commodities.

Beijing divested a total of $53.3 billion in Treasuries and agency bonds during the first three months of the year, while simultaneously increasing its purchases of gold and other commodities.

Analysts suggest this reduction in foreign exchange reserves is part of China’s broader strategy to diversify its holdings from being dominated by U.S. dollar-denominated assets amid rising geopolitical tensions with the United States.

These analysts point to the economic impact of Western sanctions on Russia following the Ukraine conflict, suggesting that China aims to mitigate similar risks. (Related: China waging “fire sale” of U.S. treasuries, dumping $53 billion in just the first quarter of 2024.)

“The handling of Russian reserves by the U.S. and other G7 countries, including threats of expropriations and sanctions, likely prompted China to reduce its exposure to U.S. Treasury assets to avoid being similarly targeted,” said Craig Shapiro, a macroeconomic adviser at LaDuc Trading, referring to the seizure of Russian assets. Since the start of the Ukraine conflict, the West has frozen approximately $300 billion in Russian sovereign funds.

The Brussels-based clearinghouse Euroclear, often viewed as a custodian of China’s holdings, disposed of $22 billion in U.S. Treasuries during the reporting period, Bloomberg reported.

As the second-largest foreign holder of U.S. Treasury securities after Japan, China’s sell-off could potentially destabilize the Treasury market and raise U.S. borrowing costs, some economists argue.

“As China is selling despite us being closer to a Fed rate-cut cycle, there is a clear intention to diversify away from U.S. dollar holdings,” said Stephen Chiu, chief Asia foreign exchange and rates strategist at Bloomberg Intelligence. He noted that China’s selling of U.S. securities could accelerate if the U.S.-China trade war resumes, especially if Trump returns as president.

While China is selling dollar assets, its gold holdings have surged in the country’s official reserves. The share of gold in reserves climbed to 4.9 percent in April, the highest since records began in 2015, according to the People’s Bank of China.

Chinese foreign exchange reserves in dollars decreasing

China, the world’s largest holder of foreign exchange reserves, had a total of $3.2 trillion in reserves as of April. While the currency breakdown is not publicly disclosed, experts estimate that no more than 60 percent of these reserves are in dollars.

Although China holds the largest foreign exchange reserves globally, Japan is the largest foreign holder of U.S. Treasuries, with almost $1.1 trillion.

Data shows that Japan’s holdings of U.S. Treasuries increased by $51.4 billion in the first quarter. This shift in holdings does not necessarily indicate outright buying or selling; China’s reduction might result from choosing not to reinvest in maturing bonds.

However, the comparison between Japan and China is significant given their positions on the global geopolitical spectrum.

While the dollar remains the dominant foreign exchange reserve currency, rising geopolitical tensions and the evolution of globalization into polarized trading blocs could erode its preeminence. This trend may already be underway.

At the end of March, total global foreign exchange reserves stood at $12.33 trillion, with $11.45 trillion’s currency composition reported confidentially to the International Monetary Fund (IMF).

The dollar’s share was 58.41 percent, the lowest on record. Many countries’ desire to distance themselves politically from the U.S. is emerging as a key driver behind this shift.

In a recent speech, IMF First Deputy Managing Director Gita Gopinath highlighted the significant increase in gold purchases by central banks over the past two years, noting it as the “most notable development” in global foreign exchange reserves during that period.

Gopinath pointed out that, despite its limited use in transactions, gold is generally viewed as a “politically neutral safe asset” that can be stored domestically and protected from sanctions or seizure.

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Watch this video from financial commentator John Willians discussing how China rapidly sped up the sell-off of U.S. Treasuries after the White House implemented new tariffs.

This video is from the ThisIsJohnWilliams channel on Brighteon.com.