Key Takeaways
Foreign holdings of US debt saw the largest valuation drop since 2024 as geopolitical tensions and a shifting custody landscape reshape global capital flows.
Foreign holdings of US Treasuries fell to a four-month low in March, driven more by valuation losses than outright selling, but a steep drop in China’s official position to a 16-year low points to a deeper strategic shift by global investors. The headline decline of $138.4 billion was almost entirely explained by a $142.1 billion negative valuation adjustment after the Bloomberg US Treasury index fell 1.7 percent, its worst month since 2024.
This move to obscure holdings was a direct response to the G7’s decision to sanction Russia’s reserves after the 2022 invasion of Ukraine, according to analysis from Brad Setser, a senior fellow at the Council on Foreign Relations and a former Treasury official. While official data suggests a flight from the dollar, the reality is likely a flight from transparency as Beijing seeks to insulate its assets from potential future sanctions.
The US Treasury Department’s monthly report showed that while foreign investors were net sellers of $16.6 billion in short-term bills, they purchased $13.5 billion in long-term bonds. Japan, the largest foreign creditor, saw its holdings fall by $47.7 billion to $1.19 trillion. China, the third-largest holder, reduced its official position by $41.0 billion to $652.3 billion, its lowest since 2008. In contrast, the United Kingdom, a key financial center, increased its holdings by $29.7 billion to $926.9 billion.
The divergence highlights a critical trend: the official data for China may no longer reflect its true exposure to US assets. The drop in China's holdings in US-based custodians that began after the Russia sanctions has been offset by a rise in Treasury holdings in European and Canadian financial centers. This suggests China is not abandoning the dollar but is instead diversifying its custodial arrangements to make its holdings less visible and harder to freeze.
The practice of using non-US custodians is not new, but it has accelerated and evolved. For years, analysts have made a "Belgium adjustment" to account for Treasuries held for China at the Belgium-based custodian Euroclear. However, according to Setser's research, the pattern has now broadened, with holdings in Luxembourg, France, and even Canada showing suspicious jumps that coincide with declines in China's official data.
This shift complicates any simple reading of de-dollarization. While China's official holdings are falling, its total exposure to US dollar assets, held through a network of international custodians, may be far more stable. The strategy appears to be one of de-risking, not divesting. The IMF, in its recent Article IV consultation for Trinidad and Tobago, noted that the war in the Middle East has elevated economic uncertainty, a sentiment echoed in a UN report highlighting how geopolitical fragmentation is undermining development finance and encouraging such risk-mitigation strategies.
The potential for wider conflict and its impact on fuel, food, and transport costs adds pressure on countries to safeguard their financial assets from being caught in the crossfire of sanctions. For China, which has not disclosed the currency composition of its reserves since 2020, building a less transparent and more resilient portfolio of US assets appears to be a key priority.
This article is for informational purposes only and does not constitute investment advice.
