Is the shift in custody locations quietly paving the way for reserve diversification? U.S. interest rates and oil prices have pushed fiscal conditions to a tense position, and China's U.S. Treasury holdings have fallen to a multi-year low. The bookkeeping numbers are changing quickly, but American experts say there is a type of move that cannot be seen or stopped.
U.S. Treasury Ledger First Undergoes a Slimming Down
By August 2026, China's on-the-books balance of U.S. Treasury securities stood at $590.7 billion, the lowest level in eighteen years, shrinking by $109 billion compared with $699.7 billion a year earlier. On the surface, this looks like a rapid round of reduction. But American think tank scholar Setser cautions that a decline in the books does not equal large-scale selling in the market; some holdings may have simply changed their registration location, moving from New York to Canada, Belgium and other places. The U.S. Treasury Department's monthly overseas holdings table is compiled by registration location, and when the registration location changes, the numbers change ownership, making it very difficult for the American side to find an intervenable target through public data. According to estimates by Setser and other scholars, some positions have indeed been shifted to custody accounts in Canada and Belgium, with the specific scale fluctuating by month, but the direction of "book declines accompanied by dispersed custody locations" is clear. The action takes place within statistical definitions and account arrangements, not on publicly visible trading screens.
America's own problems have given this adjustment sufficient reason. Federal debt surpassed $40 trillion by the end of September 2026, accounting for more than 101% of economic output. In fiscal year 2025, net interest payments on Treasury debt were about $970 billion to $1.2 trillion, surpassing the defense budget for the first time. Moody's downgraded the U.S. sovereign rating from its highest tier in May 2025, and all three major rating agencies no longer place the United States on their highest credit list. The combination of tax cuts and tariffs in Trump's second term has continued to inflate the deficit, while the Federal Reserve's independence is often pulled around by politics. Holders of U.S. Treasuries look not only at interest rates but also at whether the rules are stable.
High interest rates and high inflation continue to pull against each other. U.S. gasoline prices in August were 27.4% higher than a year earlier; Brent crude was still below $60 at the start of the year, stood above $100 in early October, and has recently moved further above $110. Raising rates cannot suppress oil supply and also makes Treasury interest heavier; cutting rates makes it hard to contain the price pressure brought by oil. The ten-year U.S. Treasury yield once rose from 4.19% to 5.27%, and recently fell back below 5% due to safe-haven flows; the thirty-year fixed mortgage rate rose from 5.98% to 7.28%. U.S. stocks are also under pressure, with this year's gains in the S&P 500 and Nasdaq 100 mainly supported by artificial intelligence, leaving valuation with little safety cushion compared with Treasury yields. If rates move one step higher, U.S. stocks will loosen before U.S. Treasuries do.
Oil Prices Export Inflation Overseas
The same round of oil price increases, however, acts like a remedy for China's industrial sector after three years of low prices. In March 2026, U.S. CPI jumped from 2.4% to 3.3%, and by August it had risen further to 3.4%; in the same month, China's PPI turned from negative 0.9% to positive 0.5%, ending a 41-month downward streak, and rose further in August. A return to positive PPI means upstream products are no longer continuously cutting prices. In the first eight months, total profits of industrial enterprises included in the statistics rose 15.7% year on year, with profit growth of 51.6% in coal mining, 51% in chemical raw materials, 82.9% in nonferrous smelting, and 17% in oil and gas extraction. These figures show that overseas energy price increases pushed profits along the industrial chain toward the resource end. Domestic refined oil price adjustments also provided a buffer. On September 24, under the mechanism, gasoline was supposed to rise by 830 yuan per ton, but after regulation the actual increase was only 395 yuan. Ordinary people feel it first at the gas station, but corporate books change faster. In A-shares, the beneficiaries are concentrated in upstream resources, with oil, coal, chemicals and nonferrous metals more directly affected. Imported inflation is income for upstream and cost for midstream and downstream, and opportunities will not be spread evenly. Improved upstream profits are not broad prosperity, but a redistribution along the price chain. Ordinary people's experience lags half a step behind, while corporate statements react first.
The risks must also be stated clearly. If the United States slides into recession under high interest rates, global demand will be dragged weaker, commodity prices will also fall, and upstream profits will shrink. The premise of this logic is that U.S. demand does not suffer a hard landing. The greater the U.S. fiscal and inflation pressure, the more incentive China has to adjust its U.S. Treasury ledger and reserve structure. These two matters are not isolated in time.
Custody Switching and Gold as a Backstop
The rapid decline in China's on-the-books U.S. Treasury holdings is not the result of a one-time dump. According to estimates by Setser and other scholars, some holdings shifted to custody locations such as Canada and Belgium; the proportion of China's foreign exchange reserves allocated to U.S. financial assets still remains in the 50% to 55% range, and some positions merely changed custody locations rather than completely leaving dollar assets. What the U.S. statistical system sees is the registration location, not the ultimate controller, and such adjustments are hard to block directly.
The longer-term moves are in gold and settlement networks. By the end of August 2026, China's official gold reserves had increased for 22 consecutive months, with cumulative purchases exceeding 100 tons (roughly in the 100-120 ton range) since restarting gold buying in November 2024, including about 20.2 tons added in August alone. It buys more when gold prices fall and stands still when gold prices surge. The cross-border RMB payment system cleared a total of 175 trillion yuan in 2024, with overseas participating institutions in more than 100 countries and regions. The cumulative goods trade surplus in the first three quarters reached $938.1 billion, with $133.5 billion recorded in September alone. At the end of September, foreign exchange reserves were about $3.4 trillion (precisely $3.4003 trillion). Euro-denominated government bonds, ASEAN local currency assets and financing for projects along the routes are also slowly increasing within foreign reserves. Gold and settlement networks as backstops carry more long-term significance than simply selling debt.
After the Russia-Ukraine conflict, about $300 billion of Russia's overseas assets were frozen, teaching central banks a lesson. In a World Gold Council survey, 85% of responding central banks believed global central banks would continue to increase gold holdings over the next year. Some market institutions have observed that gold's relative weight in central bank reserve assets is rising, with signs of a reversal in its allocation ratio versus U.S. Treasuries — this judgment requires distinguishing between "gold as a share of total reserves" and "the dollar share excluding gold," but the direction of central bank reserve diversification is clear. Japan and the United Kingdom are currently the main takers of U.S. Treasuries, with Japan holding about $1.0683 trillion and the United Kingdom about $1.0095 trillion, but Japan's debt exceeds 260% of economic output and the shadow of economic contraction in the United Kingdom has not dispersed, narrowing the room to keep supporting U.S. Treasuries. The United States wants to pull allies into supply chain and financial coordination, yet the European Union and South Korea are unwilling to choose sides between China and the United States. The dollar's share of global foreign exchange reserves has fallen below 58% (about 57%-58%), the lowest since 1995, while the RMB share is about 2%-3%, nearly doubling in five years.
Conclusion
The goal of China's current adjustment is not to create short-term market volatility, but to reduce dependence on a single currency and a single asset. Reducing U.S. Treasury holdings, increasing gold purchases, promoting RMB settlement, and expanding non-dollar assets — together these four things form a long-term project. The book numbers are falling quickly, yet the market has not seen panic selling, which itself shows that the pace has been controlled. This change is far from over, and the real highlights are still ahead. This article is an international financial observation and does not constitute investment advice. The author declares that these are personal views for reference only.
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