China dumps $22.7 billion in US treasury bills amid deepening strategic rivalry with Washington

China has offloaded USD 22.7 billion US treasury bills recently over concerns over security and a further delay to expected interest rate cuts by the American Federal Reserve, amidst its intensified strategic rivalry with Washington.

The world's second-largest economy offloaded USD 22.7 billion of the bills in February, with its total holdings adding up to USD 775 billion as of the end of that month, the Hong Kong-based South China Morning Post quoted figures released by the US Treasury Department on Wednesday. China's forex reserves, the world's highest, totalled USD 3.2457 trillion last month, according to the state-run Xinhua news agency.

For years US treasury bills were traditionally China's preferred choice to invest its forex reserves but in recent years Beijing steadily diversified its reserves as its strategic rivalry with Washington intensified.

“China's overseas investment has been concentrated on US Treasuries in the past, [but] there is space for the Chinese government to further cut back its holdings in the future,” Zhao Xijun, a finance professor at Renmin University in Beijing said. "Beijing is concerned about the impending rate reductions in the US, which will affect returns,” he told the Post.

Following a speech from Federal Reserve chairman Jerome Powell on Tuesday, economists now expect a further delay of cuts to the US benchmark rate, with reductions not predicted until September or even as late as next year.

Beijing, vigilant in the protection of its overseas assets, has slashed its holdings of US Treasury bills by 25 per cent since early 2021 to the tune of USD 280 billion. Its position hit a 14-year low of USD 769.6 billion in October 2023, a decline commonly attributed to a conscious effort to diversify its holdings, the Post report said.

Zhao noted that shifts in overseas investments are highly dependent on context, mentioning Beijing has increased its investments in gold – a commodity noted for its reliability – after an analysis of the external environment. However, observers say China's moves to diversify its assets are in keeping with rapid changes in geopolitics and its erratic relations with the US.

Alicia Garcia-Herrero, chief economist for Asia-Pacific at Natixis, said further sell-offs are possible even though US Treasury Secretary Janet Yellen brought up the issue with her Chinese counterparts during an official visit to Beijing earlier this month.

"I think the minute she said that the US wouldn't take ‘anything off the table' in response to China's overcapacity, [Beijing] wanted to give a signal that they were serious about dumping US Treasuries,” she said.

Officials from China and the US met in Washington on Tuesday to exchange their views on financial stability, regulatory cooperation, cross-border payment and combating money laundering as part of the recently established bilateral financial working group. However, no details were provided.

Garcia-Herrero noted that the combined holdings of Europe and Japan are bigger than China's, meaning the US “could mitigate the sell-off” without “a major impact”, the Post reported.