China Reduced Exposure to U.S. Debt Amid Tariff Conflict

China is willing to reduce some of its positions in U.S. debt amid the ongoing trade war. In March, the U.S. Department of the Treasury revealed that China lightened its U.S. Treasury holdings by $18.9 billion.

The U.S. Department of the Treasury disclosed on Monday that China decreased its exposure to U.S. debt in March, selling nearly $19 billion in Treasuries.

This reduction was recorded in March as the trade conflict between the two countries worsened, raising concerns about the potential use of these assets as a weapon in the context of a trade war.

At the same time, Japan, the largest holder of U.S. Treasuries, and the U.K., which is also affected by the tariff war, saw increases in their holdings.

These changes in portfolio preferences come as some Chinese analysts have expressed worries about the safety of their country’s assets in the U.S., considering the possibility of a U.S. default on its debt due to the escalating tariff scenario.

In March, China’s U.S. debt holdings decreased to $765.4 billion from $784.3 billion in February, falling to third place among the top holders, sliding behind the U.K.

At the same time, Japan increased its U.S. Treasury holdings to $1.018 billion, becoming the largest holder of U.S. debt for the third month in a row.

These shifts occurred as the trade war reached new heights, with the Trump administration imposing a 100% tariff on $210 billion worth of Chinese goods, effectively a de facto embargo on all major categories of imports from China.

Moreover, the administration threatened to impose tariffs on an additional $300 billion in goods, effectively covering all remaining imports from China.

The tariffs on the $210 billion tranche were set to take effect on March 1, but ultimately, faced a brief delay.

“China must have a set of countermeasures through repeated scenario planning to safeguard the security of its assets and to effectively respond to any measures by the U.S.,” said Yu Yongding, a former adviser to China’s central bank, in an interview with the state-run Global Times in March.

At the time, some analysts noted that the U.S. might struggle to raise funds to finance its budget deficit if major foreign central banks, such as those in China and Japan, decided to significantly reduce their U.S. debt holdings.

However, they also pointed out that these foreign official institutions' investment decisions in U.S. Treasury securities are guided by economic and financial factors, and they are not expected to engage in any actions that could further escalate trade or currency market volatility.

“The downgrade reflects the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than those of similarly rated sovereigns,” said Moody’s in a statement downgrading the U.S. debt’s perfect credit rating from ‘AAA’ to ‘Aa1.’

In February, at the start of the trade war, China increased its debt holdings by over $20 billion, surprising some who expected the opposite as the first set of unilateral tariffs on imports from the Asian country were announced and later escalated.

At the beginning of the year, a report by the Institute of International Finance indicated that foreign investors sold a record amount of U.S. stocks and bonds in November as trade tensions heightened.

According to the report, foreign investors sold a net $121 billion in U.S. stocks and bonds, the largest monthly reduction on record and a significant increase from October’s sales of $40 billion.

This selling pressure was evident in the U.S. Treasury securities market, where foreign investors sold a net $88 billion in November, the largest monthly reduction since March 2008, at the height of the global financial crisis.

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