China’s Treasury bond holdings came to US$970 billion at the end of July, US Treasury Department data shows – a small increase from June, preceded by seven straight months of declines. While the total has been trending lower since 2018 amid the trade war between Washington and Beijing, it sank by US$100 billion, or nearly 10%, in the first half of 2022 alone.
That decline – the steepest on a half-year basis since 2016 – coincided with a US$38.5 billion rise in Treasury holdings in the Cayman Islands and a US$7 billion increase in Bermuda, both well-known tax havens.
This suggests China may be hiding some of its dollar assets in these jurisdictions, giving Beijing a way to sidestep Western financial sanctions if its access to greenbacks is restricted.
Chinese financial authorities say that the cuts to the country’s direct US debt holdings aim to protect against the risk of losses from interest rate hikes, but the freezing of Russian central bank assets in response to the invasion of Ukraine appears to have been a factor as well.
A Chinese government insider noted with surprise in March that those sanctions “dealt a much bigger blow than locking Russia out of SWIFT,” the global payments system.
That could have implications for Beijing, which is believed to be preparing to unify Taiwan with the mainland by force. If the US, Europe and Japan responded to such a conflict with financial sanctions, Beijing could be cut off from much of its more than US$3 trillion in foreign-currency reserves, with enormous consequences for the Chinese economy.
Dollar-denominated assets made up 59% of China’s reserves in 2016. The drop in Treasury holdings, which can be viewed as a proxy for dollar assets, suggests that Beijing is relying less on the greenback to settle trade payments.
Meanwhile, Russia has stepped up its use of the yuan, mainly in trade with China. State-run Gazprom said this month that payments for gas supplies to China would switch to rubles and yuan instead of dollars. Sberbank, Russia’s largest bank, has begun offering yuan-denominated loans.
Russia accounted for the third-largest share of yuan payments outside mainland China in July, according to SWIFT data. This works well for China, which can buy fossil fuels from Russia without needing to use dollars.
Beijing appears to be replacing some of its Treasury holdings with gold. China’s gold imports more than doubled on the year in August to US$10.36 billion, the largest sum in government statistics going back to 2017.
The metal, as a highly liquid asset, is seen as a sort of stateless currency. Other countries keeping Washington at a distance, including Russia and Turkey, also have been cutting their US bond holdings in favour of gold.
China had about 1,950 tonnes of gold in its reserves as of August, roughly unchanged from September 2019. While the metal is used in industrial and medical applications along with jewellery, demand is weakening in China’s sluggish economy.
State-owned banks are believed to be holding on to gold as a safe asset outside the scope of the country’s official reserves.