Is China really ‘dumping’ US debt? The truth behind the $600 billion Treasury shift

"China is offloading US bonds to decouple from the dollar." This claim has circulated intensely in mainstream media lately, fueled by a narrative that "the end of the dollar is near," that "the US will lose its funding base," and that "bond yields will skyrocket." But are these claims well-founded? This is exactly what we will examine in more detail.

Let us begin with the chart that has caused such widespread concern.

As shown, China's holdings in US Treasury bonds have decreased from nearly $1.2 trillion to $600 billion—a 50% drop. On the surface, one can understand the reasons for concern, as the decline over the last decade supports a "clean" and simple narrative. However, the problem lies in the leap between observation and conclusion. A lower figure for "China, Mainland" does not equate to a forced sale, nor does it prove intent or a structural exit. What it actually demonstrates is a lack of understanding regarding the dynamics of reserve management and, in China’s case, the necessity of protecting those reserves.

Let us start with the US Department of the Treasury, which notes that its holding tables are based "primarily on custody data." This phrase is significant. Custody data records where securities are held for settlement and safekeeping. The crucial point is that the custodian is not necessarily the beneficial owner, and this distinction undermines the dominant narrative.

The Treasury Department's own FAQ section is decisive

"If a US Treasury security purchased by a foreign resident is held in a custody account in a third country, the actual country of ownership will not be reflected." The system is designed to track where the bonds are located, not whose balance sheet carries the risk. This is critical when examining the narrative that China is "dumping" its bonds and moving away from the dollar.

Those jumping to this conclusion failed to ask the right question: "Where was the custody transferred?" This matters to investors because it changes the risk assessment. If China were truly liquidating, we would expect to see pressure at bond auctions, sustained tension on the balance sheets of primary dealers, and visible stress in dollar funding markets. While such episodes appear occasionally—often linked to Fed monetary policy or risk shocks—there is no clear link to the "China is selling" narrative. A better approach is to follow the settlement path, which leads us to the connection with Belgium and Luxembourg.

The Belgium and Luxembourg connection

Over the last decade, geopolitical risk has surged. Heavy sanctions have been imposed on Iran and Russia, assets have been frozen or seized, and political pressure has mounted. If you are a country with significant dollar reserves facing the risk of sanctions or asset freezes, what measures would you take to mitigate that risk?

A characteristic example:

"Policy makers in Beijing are mindful of the 2022 precedent, when the US and its allies froze about $300 billion of Russia's central bank reserves following the invasion of Ukraine. The fear is that if tensions escalate, the US could, in an extreme scenario, restrict China's access to state and private dollar assets in a similar fashion." – Bloomberg

The dollar, the yuan, and strategic stability

It is crucial to understand the two primary economic reasons why China buys and holds US Treasuries. The most important is that China wishes for its currency, the yuan, to be pegged to the dollar—a practice common since the Bretton Woods Agreement of 1944.

A yuan-to-dollar peg helps keep the cost of Chinese exports low, particularly to the US, its largest customer, which the Chinese government believes boosts international competitiveness. Second, the link to the dollar provides stability to the yuan, as the dollar is still considered the safest currency in the world. To conduct global trade, China holds its reserves in US bonds, gold, or dollars.

However, the fact that China owns US bonds does not mean it must hold them in custody within the US. In the same table, Belgium shows approximately $481 billion in holdings and Luxembourg approximately $425 billion. These are enormous sums for such small countries that do not accumulate reserves on this scale. In reality, Luxembourg and Belgium serve as custody hubs for China. During the same period that China's holdings decreased by $600 billion, Belgium's increased by approximately $500 billion. This is not a conspiracy; it is operational infrastructure.

A key reason China uses Belgium is that it is the headquarters of Euroclear Bank, a central hub for cross-border settlement and collateral mobility. Clearstream has its international depository in Luxembourg and serves global institutional clients. When a central bank or state entity wants to hold a large bond portfolio with flexibility in settlement and collateral, these hubs help manage operational challenges.

With this understanding, it becomes clear that the "China is selling bonds" narrative is incomplete. It arises when one focuses on a single line item and ignores the broader context.

Why China is moving its custody

Beyond mitigating geopolitical risk, there are four practical reasons:

1. Settlement Efficiency and Scale: Large reserve portfolios require scale, operational redundancy, and deep interconnection of settlement systems. European hubs offer this.

2. Collateral Mobility and Funding Flexibility: US bonds serve as collateral. They are not just an investment but a financing tool.

3. Risk Management After Sanction Shocks: Following the freezing of Russian reserves in 2022, reserve managers re-evaluated legal and operational exposures.

4. Data Perception and Portfolio Composition: Moving custody to a third country changes the table's appearance. A holder may reduce Treasuries but increase other dollar assets (gold, agency bonds, deposits) without reducing overall dollar exposure.

How investors should view US bonds

Investors should treat US bonds as a tool rather than a geopolitical referendum.

US Treasury bonds:

1. Serve as the benchmark for "risk-free" dollar pricing.

2. Are at the core of repo markets and collateral systems.

3. Act as a settlement asset during periods of stress.

4. Their yields are primarily determined by expectations for growth and inflation. Federal Reserve policy affects the short end of the interest rate curve, while growth and inflation drive the long end.

If you require:

• Liquidity and loss control, prefer short-term to medium-term bonds.

• Income with controlled volatility, use a "ladder" strategy.

• Adjustment to inflationary uncertainty, combine nominal bonds with TIPS.

The primary risks are:

• Duration risk

• Inflation risk

• Monetary policy risk

The narrative that "China is selling" is not a risk worth significant concern. Focus on the correct alignment of duration and inflation sensitivity with your time horizon and risk tolerance. Treat news headlines as noise and US bonds as a tool for cash flow, liquidity, and risk management. You will be in a much better position.

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