UK overtakes China as second-largest holder of US Treasury bonds

For the first time since the beginning of the century, the United Kingdom has surpassed China’s recorded holdings of US Treasury bonds, revealing a shift in Beijing’s management of its foreign exchange reserves.

According to a report by the Financial Times (FT), the value of Treasury bonds held by Chinese investors, as recorded by US banks and custodians, fell to $765 billion at the end of March from $784 billion the previous month.

Based on data released late Friday, the value of bonds held by British investors increased by approximately $30 billion to $779 billion.

This transition makes British investors the second-largest foreign holders of US Treasury bonds, after Japan. It is the first time since October 2000 that British holdings have exceeded China’s, and it is seen as the latest sign that Beijing is seeking to diversify away from US assets.

“China is selling slowly but steadily; this is a warning for the US,” said Alicia García-Herrero, chief Asia-Pacific economist at Natixis. “This warning has been present for years, it is not sudden, and the US should have acted much sooner.”

The data will serve as a warning signal for the US administration, following news that Moody’s, after Fitch and S&P, downgraded the world’s largest economy’s triple-A credit rating due to rising debt and deficits.

Beijing has been gradually reducing its official US bond holdings from a peak of over $1.3 trillion in 2011, diversifying into other assets such as US agency bonds and gold. Part of the decline in the value of China’s assets may also reflect market movements.

Analysts believe that China holds an increasing portion of its US assets through third-party custodians like Euroclear in Belgium and Clearstream in Luxembourg, which conceals the true level of its holdings. While the value of Luxembourg’s treasury bond holdings remained stable in March, Belgium’s increased by $7.4 billion compared to February.

China’s massive stockpile of Treasury bonds is a result of decades of trade surpluses with the US, a surplus that President Donald Trump is currently trying to reduce.

However, White House officials have expressed concern that foreign sales of Treasury bonds could drive up yields, making it more expensive to refinance debt.

The share of China’s Treasury holdings in short-term bills—the most liquid securities that can be sold most easily in a crisis—reached its highest level since 2009 in March.

“Based on the visible data, there is no doubt that China is shortening the maturity of its US portfolio,” said Brad Setser, a senior fellow at the Council on Foreign Relations and a former US Treasury official.

From the UK’s perspective, the increase in recorded assets does not reflect its own reserves. Analysts say it more likely reflects London’s role as a center for international capital.

Holders in Europe include insurance companies, banks, and custodians. Some hedge funds engage in arbitrage by holding Treasury bonds and selling futures or swaps. These positions are popularly known as the “basis trade.”

Setser said the UK figures “likely reflect an increase in Treasury bonds held by global banks, the availability of custody services in London, and potentially the activities of some hedge funds.”

Analysts noted that the data, which only shows movements up to the end of March, does not reflect measures taken by China after Trump escalated the trade war.

“It is likely that China has made significant changes to its reserve management in the last six weeks, and these will only become clear over time,” Setser said.