MNI INTERVIEW2: China To Adjust UST Holdings In Trade Tensions

China will continue to diversify its foreign reserves if economic and trade relations with Washington deteriorate and the safe-haven status of U.S. debt comes into question, an economist at a state-owned bank told MNI, noting that the People’s Bank of China will continue to ensure a stable yuan to anchor market confidence amid tariff tensions.

“U.S. tariffs raise concerns about the arbitrariness of its policy, while China’s large holdings of U.S. Treasuries could become a key leverage point for Washington to pressure Beijing,” Zong Liang, chief researcher of Bank of China, said in an interview, adding that the freezing of Russia's dollar assets has raised concerns about the security of dollar-denominated assets.

China’s large bond holdings are “a reflection of the mutual dependence in China-U.S. economic and trade relations,” Zong said, adding that China considers that bonds should not be used as financial weapons. While the U.S. balance runs a goods deficit, its surplus in services is very large, he noted. (See MNI INTERVIEW: PBOC To Ease In Tariff Response - BOC's Zong)

The unique global role of the dollar has also naturally led to China’s accumulation of Treasuries, though this role could be jeopardised if the U.S. prioritises eliminating its trade deficit, Zong said. If this occurs, the dollar’s international dominance and security would be diminished, destabilising the global monetary system and reducing China’s need to hold large volumes of Treasuries, he said.

NATURAL PROGRESSION

“Against the backdrop of a more diversified global economy and heightened geopolitical risks, China’s shift toward a more balanced forex reserve strategy is a natural progression,” Zong said.

China’s U.S. Treasury holdings had already declined to USD760.8 billion in January 2025, half the peak level of USD 1.3 trillion in 2013, according to U.S. Treasury Department data, as China has instead built up its holdings of gold.

Chinese retail investors are also likely to gradually move toward a more diversified investment portfolio, in a rational response to market changes, Zong said.

Meanwhile, the PBOC will continue to ensure the stability of the yuan, he said. A weaker currency would be of limited use in boosting exports given extremely high U.S. tariffs, he said, while a stable yuan is key for maintaining market confidence, so China will not resort to significant devaluation of its currency. 

Banks and major import-export firms are also likely to adjust their FX settlement strategies to support currency stability, Zong added.