The much-speculated Chinese campaign to undermine the dollar by dumping Treasuries is a myth, expert says

• China's holdings of US government bonds have declined steadily in recent years, hitting the lowest levels since 2009 this summer.
• But that doesn't necessarily mean Beijing is deliberately shifting away from dollar assets, according to strategists at Lloyds Bank.

China's holdings of US government bonds recently hit a 14-year low. The No. 2 foreign owner of Treasurys has been steadily trimming its portfolio for years.

Simultaneously, the Asian nation has also been at the forefront of an international movement — known as de-dollarization — to reduce reliance on the greenback in cross-border trade and investment flows, amid concern Washington could "weaponize" the greenback's dominance to impose economic sanctions. Such fears have grown after the US slapped embargoes on Russia and Iran in recent years.

Predictably, financial markets have been rife with speculation in recent months that Beijing is calculatedly cutting back investments in US bonds to undermine the dollar and dent the pre-eminence of Treasuries as the most reliable asset class in the world.

But that's a mere myth, according to at least expert.

While China's holdings of Treasuries have indeed fallen by some $220 billion since the end of 2021, the reality is more nuanced, according to strategists at the UK-based Lloyds Banking Group led by Sam Hill.

According to them, the decline in the Asian country's ownership of US government bonds also indicates some other reasons than a deliberate shift away from American assets, such as:

• Beijing has diversified some of its investments into so-called American agency debt — securities issued by government-sponsored enterprise or a federal agency, "which is US government in all but name."
• The shrinkage of China's US debt holdings also reflects a drop in bond valuations at a time when the Federal Reserve raised interest rates at the fastest pace in four decades.
• China may have sold US Treasuries (USTs) to raise dollars that it would in turn sell in the local market to stabilize its own currency, the yuan, during times of elevated exchange-rate volatility. The Chinese currency plunged to an almost 16-year low last month, and is currently on track for the biggest two-year decline in more than three decades.

Official data "suggests there's been a persistent decline in Chinese US bond holdings. To many this reflects a conscious shift by China to reduce its exposure to US government debt, amid a period of increasingly strained geopolitical tension, accelerated by the seizure of Russian foreign assets following the invasion of Ukraine," Hill and colleagues wrote in a research note published earlier this month.

"But you do not need to scratch deep to reveal it's myth, USTs appeal still looks enduring," they added.

The slide in China's Treasury holdings attracted much attention particularly as the declines accelerated over the past year and a half, a time when US bonds have been in the throes of a historic rout. The selloff saw benchmark 10-year yields more than triple since the end-2021 to breach the psychologically important 5% mark this week, fueled by the Federal Reserve's aggressive interest-rate increases.

Over the longer term, any deterioration in relations between the West and rival countries such as China could actually boost demand for the safe-haven appeal of Treasuries, according to the analysts.

"There is value on being able to hold assets (directly or indirectly) in democracies bound by the rule of law. The more autocratic non-democratic regimes become, the more appealing assets in safe havens will be. That is clearly visible in the constant march of private sector cash into the US," Hill and team added.