We have seen little evidence of China selling US Treasuries in recent years, despite growing unease by Chinese policymakers. 

After adjusting for the likely use of custodian services, such as Euroclear, we believe that China’s ownership of USTs is proving relatively stable. 

Banks and state-owned enterprises play an increased role in managing China’s foreign assets and currency, while also helping to disguise the scale and composition of reserves. 

Ongoing current account surpluses could however suggest that the share of China’s assets denominated in USD has been falling.

While China could opt to sell USTs at opportune times in the hope of recruiting “bond vigilantes” to moderate US tariff policy, it is not clear that an abrupt and complete exit is a credible threat.

Aside from the self-inflicted losses that China would incur and the potential for significant short-term market disruptions, ‘weaponisation’ can be offset by the Fed.

That said, should China gradually reduce exposure to US assets both in absolute and relative terms, this would temper support for US bonds and the USD.

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