China, Saudi Arabia Cut US Debt Holdings in Anti-Dollar Push: Treasury Data

U.S. President Joe Biden and Saudi Crown Prince Mohammed bin Salman (front) arrive for a photo during the Jeddah Security and Development Summit (GCC+3) at a hotel in Saudi Arabia's Red Sea coastal city of Jeddah on July 16, 2022. Mandel Ngan/AFP via Getty Images

China and Saudi Arabia slashed their holdings of U.S. government debt in June, according to new Treasury Department data.

Beijing dumped more than $11 billion in Treasury securities to $835.4 billion, down by 1.3 percent month-over-month and 11 percent year-over-year. This is the lowest total since the middle of 2009.

Riyadh trimmed its U.S. debt holdings by more than $3 billion to $108.1 billion, down by nearly 3 percent from May and more than 9 percent from the same time a year ago. Since the beginning of 2020, the Saudis have slashed their Treasury stockpiles by more than 41 percent.

Other notable countries to decrease their Treasury holdings were India ($3 billion), Brazil ($3 billion), and the United Arab Emirates ($4 billion).

But not everyone was a seller in June.

Japan picked up nearly $10 billion in U.S. debt, although its stockpiles are down by 10.3 percent year-over-year at $1.105 trillion. The list of countries to add to their Treasury piles includes Canada ($5 billion), the UK ($12 billion), France ($7 billion), and Israel ($7 billion). Ukraine scooped up more than $2 billion, lifting its year-over-year purchases by nearly 166 percent to $21.8 billion.

Because of substantial liquidity levels, Treasurys are considered one of the safest assets to own in the global financial markets. Despite the credit downgrade from Fitch Ratings earlier this month surrounding “fiscal deterioration,” U.S. government officials and market analysts concur that demand remains strong.

In total, foreign holdings of U.S. government debt stood at $7.563 trillion in June, up by 0.5 percent from the previous month. This was also up by 2 percent from June 2022.

A Chinese bank employee counts 100-yuan notes and U.S. dollar bills at a bank counter in Nantong, Jiangsu Province, China, on Aug. 6, 2019. STR/AFP via Getty Images

Although experts agree that it’s unlikely to happen anytime soon, if more nations shed their Treasury security holdings, it could result in lower demand for U.S. debt and higher interest rates. This makes it costlier for the federal government to borrow money to pay its bills and would diminish the dollar’s value.

Fiscal year-to-date, the U.S. government has spent approximately $700 billion in interest payments, making Washington poised to cross the $1 trillion mark for the first time.

Geopolitical Shifts and Asset Allocation

Economists have provided several reasons why China, Saudi Arabia, and other governments are reducing their exposure to U.S. Treasurys.

Since the Federal Reserve started its quantitative tightening cycle in March 2022, interest rates have climbed to their highest levels in more than two decades. Minutes from the July Federal Open Market Committee suggest that officials are open to more rate hikes amid “significant upside risks to inflation.” If rates continue to increase, this will result in lower bond prices. As a result, investors might want to decrease their holdings before prices trend lower.

In addition to the central bank’s effect on the bond market, the current tightening cycle has strengthened the U.S. dollar, allowing it to trade above pre-pandemic levels. This has also effectively weighed on other currencies and depreciated their purchasing power, particularly for countries that are net importers.

Another assertion is that countries are diversifying their assets at a time when the U.S. government is experiencing fiscal challenges, and nations are engaging in de-dollarization campaigns.

The International Monetary Fund’s (IMF) first-quarter Currency Composition of Official Foreign Exchange Reserves data show that more governments are adding Chinese yuan, Japanese yen, Australian dollars, Canadian dollars, and Swiss francs to their foreign exchange reserves. The U.S. dollar still leads other currencies by vast margins, but other assets are gradually chipping away at the dollar hegemony.

Central banks have been boosting their gold reserves, too. According to data compiled by the World Gold Council, central bank gold demand in the first half of 2023 was the highest on record. The industry group found that nearly one-quarter of central banks plan to increase their gold holdings over the next 12 months.

Saudi Arabia’s total reserves were $478.23 billion last year, down from the 2014 peak of $744.44 billion, according to the IMF. Chinese reserves were $3.31 trillion in 2022, slightly down from the 2014 peak of $3.9 trillion.

Saudi officials have sought to allocate more of the country’s crude revenues toward the National Development Fund and the Public Investment Fund. The former has been directed to invest in the nation’s infrastructure. The latter is the sovereign wealth fund that has been expanding its holdings in electric automaker Lucid, Electronic Arts, Uber, Take-Two Interactive Software, and Live Nation.

For Riyadh, the decline in its Treasury holdings is another indicator of its pivot away from the United States and toward Asia. The Saudi Kingdom has been bolstering its economic, energy, and security cooperation with China, a development that experts contend threatens U.S. interests.

Over the past 18 months, Saudi leadership has expressed a willingness to trade in currencies other than the greenback. This has encouraged Gulf states and other major markets to join the anti-dollar crusade and enhance regional trade.

Earlier this week, India acquired 1 million barrels of crude oil from the United Arab Emirates using rupees rather than the dollar for the first time. This was ostensibly the first transaction in a long-term arrangement as the two powerhouse economies plan to settle more trade in their local currencies to eliminate dollar conversions, cut transaction costs, and establish a real-time payment link for cross-border money transactions.