China diminished its large stake in American debt in March – before the trade war with Donald Trump – according to new figures released by the Treasury Department. China’s holdings shrank slightly from the previous month to $765 billion, while the United Kingdom’s grew by a similarly small margin to $779 billion, taking the former’s spot as the second largest holder of Treasuries. It’s the first time that the UK holds more US debt than China since June, 2002, when they each held $83 billion and $81 billion, respectively. China’s recent figures continue a gradual decline from a peak of $1.3 trillion in 2013. The Treasury Department’s data from March also shows a continued increase in foreign holdings, reaching an all-time high of $9.05 trillion.
The new data reveals changes up until March 31st, before Trump’s “Liberation Day” tariffs announcement on April 2 briefly sent the bond market spiraling downwards. Foreign investors sold off Treasuries over the week that followed, driving up interest rates and forcing President Trump to put a pause on most tariffs days later. Some have suspected that China may have taken part in the selloff. Higher interest rates would make it more challenging for the United States government to continue running budget deficits, and would increase the cost of borrowing across the US economy.
The news of China’s diminishing stake in American debt comes as Japan recently hinted at using its massive $1.1 trillion of Treasuries as leverage in other areas. The country’s finance minister, Katsunobo Kato, said earlier this month that selling US Treasuries was “a card on the table” in trade negotiations, before backing away from the statement a day later. Japan has seen record inflows into its equities and long-term bonds from investors fleeing US markets over the past month. The Treasury’s data showed that, at least pre-Liberation Day, Japan had been taking on more in its holdings of US debt for three straight months.
US Treasuries are also contending with Moody’s downgrade of America’s credit rating to Aa1 from Aaa, a move which is also expected to raise interest rates.
