China Releases US Debt

Defence affairs analysis 

The United Kingdom has surpassed China as the second largest global holder of US public debt.

The English ally now holds $779 billion, partly taking the place of the BRICS which are offloading their holdings. China falls back to third place, with $765 billion. Japan remains the top holder, with $1.113 trillion.

The same observation applies to the Cayman Islands, Luxembourg, Belgium, and Ireland. The dollar reserves of these countries are completely decoupled from their GDP.

China is moving in the opposite direction. After peaking at over $1.3 trillion in 2013, its dollar reserves continue to decline.

The Middle Kingdom has notably shifted towards gold and European bonds. And although China purchased $23 billion in Treasury bills in February, it was not enough to offset its maturing holdings.

Geopolitical Tensions

China’s gradual withdrawal reflects rising geopolitical tensions and concerns about the US fiscal situation.

Tax revenues are expected to reach $5.2 trillion in 2025 against expenditures exceeding $7 trillion. Meanwhile, pressure is mounting on the Fed chair, suggesting Republicans have chosen the easy way out. Donald Trump is certainly eyeing a new Quantitative Easing (money printing).

Moreover, China has taken note of the EU freezing €300 billion of Russian reserves. How long before the US does the same with China?

This is why the United States is imposing customs taxes and fueling the flames of the war in Ukraine. Ultimately, the aim is to deter the BRICS from dedollarizing too quickly.

The following chart indeed shows that foreign investors now hold only 31% of US debt, down from nearly 60% in 2008, at the dawn of the subprime crisis and the start of Quantitative Easing…

The BRICS often talk about a new currency, but nothing concrete exists at the moment. It is also likely that such a currency will never exist. Replicating the European model would be extremely risky for such diverse economies and cultures.

And this is a problem. Russia, for example, stopped accepting the Indian rupee for its oil trade early last year. The reason being that India does not produce enough of the products Russia needs, unlike China (High-Tech, vehicles, machinery).