In practice, the answer is unclear. From May 2022 to January 2023, the total holdings of treasuries, as reported by the U.S. Treasury Department, went up from US$7.4 billion to US$7.5 billion, down to US$7.1 billion, then back to US$7.4 billion, an almost nil change over these eight months. During the period, the treasury yields went down, up then down again. This suggests foreign governments tend to underweight treasuries when yields rise and overweight when yields come down. This is indeed a typical fund manager herding behavior.
Examining the top few foreign government holders, we see some similar mixed behavior over the latest month-on-month change (from 12/2022 to 1/2023): Japan (largest holder) increased, China (second largest) decreased, while the UK (third largest) increased. Belgium (fourth largest), which already holds much less, decreased. The alternating pattern concludes there is no unified view over the issue. U.S. dollar holdings seem affected more by specific country factors than common global factors (like world inflation and interest rate trend).
China is no exception. For a country like this, where the economy is much stronger than the financial market, most forex (including U.S. dollar) is obtained from exports (at the trillion U.S. dollar level) while less from foreign direct investment (FDI) or money inflow (both at a billion U.S. dollar level). The accompanying chart verifies this, where the growth of treasury holdings has been in line with that of exports over the recent decades. In recent years, however, there was a clear shortfall of treasury holdings with respect to export growth, evidence of significant underweighting.
Since the discrepancy began in mid-2020, the in the early months of COVID, there were two more potential reasons for underweighting apart from active de-dollarization. One significant source of U.S. dollar consumption was COVID-related expenditures, and another significant source of U.S. dollar vaporization was capital outflow. Yet another source of U.S. dollar outflow was some unofficial transfer to Russia or like countries. Finally, there could be forex reserve loss by overweighting non-U.S. dollar currencies and gold, which saw depreciation most over the past few years.
Without detailed data, it is not easy to tell exactly which factors played and by how much. However, as all these factors were likely in play together, there should not be too much room for the Chinese government to actively de-dollarize. There is a political reason to believe that they did de-dollarize, but the overall trend was still subject to the largest source of forex earnings—exports, which has been on a downtrend albeit with occasional rebounds (for instance, in March 2023).
