Ahead of the US debt storm! China reduced its holdings of US debt in March, stepping down to become the US's third-largest overseas "creditor"

The US Treasury Department released the Treasury International Capital (TIC) report for March 2025 last Friday (May 16) local time. The report showed that for the first time since the beginning of this century, China's holdings of US Treasuries fell below those of the UK, allowing the latter to surpass China and become the second-largest overseas "creditor" of the US, with China dropping to third place.

According to data from the US Treasury Department, the recorded scale of China's holdings of US Treasuries by US banks and custodians fell to $765 billion at the end of March, down from $784 billion the previous month. During the same period, the UK's holdings of US Treasuries increased by nearly $30 billion to $779 billion.

This change made the UK the second-largest overseas "creditor" of the US after Japan, with China dropping to third place. It was also the first time since October 2000 that the UK's holdings of US Treasuries exceeded those of China.

Since April 2022, China's holdings of US Treasuries have remained below $1 trillion. This further reduction has brought China's holdings close to the low of $759 billion seen in December last year, which was the lowest level since February 2009. In February 2009, China's holdings of US Treasuries stood at $744.2 billion.

Since reaching a peak of over $1.3 trillion in 2011, China has been gradually reducing its holdings of US Treasuries and shifting towards other assets such as US agency bonds and gold. The decline in the value of China's US Treasury holdings may also partially reflect market volatility. March was just before the current round of turbulence in the US Treasury market.

Alicia García-Herrero, Chief Economist for Asia-Pacific at Natixis Bank in France, said, "China has been slowly but steadily selling (US Treasuries), which is a warning to the US. This warning has been around for years and is not sudden in itself."

It is worth mentioning that while reducing its holdings of US Treasuries, China has also been increasing its gold reserves.According to the latest statistics released by the State Administration of Foreign Exchange, as of the end of April 2025, China's gold reserves stood at 73.77 million ounces, up 70,000 ounces MoM. This marked the sixth consecutive month that the central bank has increased its gold reserves. The increase in gold reserves has become a testament to the diversification trend in China's foreign exchange reserve investments.

China's massive holdings of US Treasuries are the result of decades of trade surpluses with the US, which US President Trump is currently seeking to reduce. However, at the same time, US government officials have also expressed concern about foreign countries selling off US Treasuries, as this could push up US Treasury yields and make debt refinancing more expensive.

Industry insiders said that among China's holdings of US Treasuries, the proportion of short-term Treasury bills reached its highest level since 2009 in March. These short-term Treasury bills are the most liquid securities and are most likely to be sold off during times of crisis.

Brad Setser, a senior fellow at the Council on Foreign Relations and a former US Treasury official, said, "Based on available data, there is no doubt that China has shortened the duration of its US asset portfolio."

Changes in Open Interest of Other "Creditors"

Industry insiders said that the increase in the UK's holdings of US Treasuries may not reflect changes in its own foreign exchange reserves. Instead, analysts said it reflects London's role as an international capital hub.

European holders of US Treasuries include insurance companies, banks, and custodians. Some hedge funds hold US Treasuries and engage in arbitrage by selling futures or swaps—these positions are colloquially known as "basis trades," and the unwinding of these trades was one of the triggers for the significant sell-off of US Treasuries in April.

Setser pointed out that the UK's open interest figures "may reflect the increase in global banks' holdings of US Treasuries in March, the availability of custodial services in London, and some potential activities of hedge funds."

As the largest overseas "creditor" of the US, Japan increased its holdings of US Treasuries by $4.9 billion in March, marking the third consecutive month of increase, reaching $1.1308 trillion. Since surpassing China in holdings in June 2019, Japan has remained the largest overseas holder of US Treasuries.

Overall, the scale of US Treasuries held by foreign investors in March increased from $8.8164 trillion in February to $9.0495 trillion, marking the third consecutive month of growth. Among the top ten overseas "creditors" of the US, only China and Ireland reduced their holdings of US Treasuries that month.

However, analysts said that since the report only shows data on changes in open interest as of the end of March, it does not reflect actions taken by countries after Trump escalated the trade war under the pretext of a so-called "Liberation Day," so significant changes may still appear in the April TIC report to be released next month.

According to the schedule, the US Treasury Department is set to release the April TIC report on June 18, 2025. At that time, all parties are expected to closely monitor the movements of major overseas "creditors" of the US to determine whether they are related to the abnormal fluctuations in the US Treasury market in April. In April this year, the US market experienced a "triple hit" in stocks, bonds, and the currency, with the yields on 10-year and 30-year US Treasuries briefly touching 4.5% and 5%, respectively.

Last Friday local time, Moody's, one of the three major international credit rating agencies, downgraded the US's sovereign credit rating from Aaa to Aa1, citing the increasing proportion of US government debt and interest payments. Moody's is the last of the three major rating agencies to strip the US of its AAA rating.