China's reduction in U.S. Treasury holdings in March was the result of multiple short-term factors converging, aligning with the trend seen among other major economies and not a phenomenon unique to China.
On May 19, the U.S. Department of Treasury released the latest Treasury International Capital (TIC) report, showing that total U.S. Treasury holdings by foreign investors decreased from $9.49 trillion in February to $9.35 trillion. Specifically, holdings by mainland Chinese investors fell from $693.3 billion in February to $652.3 billion in March.
From a broader market perspective, the reduction in U.S. Treasury holdings in March was not exclusive to China. Other major economies, including Japan, Canada, and South Korea, also reduced their holdings.
This development is attributed to both a common short-term factor—heightened market risk aversion due to the U.S.-Israel-Iran conflict—and a longer-term structural trend of global foreign exchange reserve diversification. It reflects both a natural market reaction to geopolitical tensions in the Middle East and energy supply disruptions, and a proactive adjustment by global investors amid financial market volatility and reduced U.S. dollar liquidity.
Geopolitical conflict served as the most direct catalyst for the reduction in U.S. Treasury holdings by multiple countries in March. The U.S.-Israel-Iran conflict triggered significant financial market turbulence, with liquidity needs driving investors to sell U.S. Treasuries. A sudden surge in panic and energy price shocks led to a sharp tightening of financial market liquidity. Some investors, adopting a "cash is king" approach for safety, actively reduced their holdings of longer-duration U.S. Treasuries to lower portfolio risk exposure.
Data from the Federal Reserve's custody holdings shows that between February 25 and the end of March, the U.S. Treasury holdings of foreign official and international accounts at the New York Fed declined by nearly $82 billion over approximately five weeks.
Simultaneously, falling U.S. Treasury prices also led to a passive shrinkage in the market value of these holdings. In March, war and maritime blockades drove up international oil prices, raising inflation expectations and weakening market bets on Federal Reserve interest rate cuts within the year. The yield on the 10-year U.S. Treasury note rose sharply by about 38 basis points to 4.32%, while the Bloomberg U.S. Treasury Total Return Index fell approximately 1.7% for the month, marking its largest decline since October 2024.
The TIC data measures U.S. Treasury holdings at market value. When rising yields cause bond prices to fall, the nominal value of holdings for each country will passively decline due to the price drop, even if investors have not engaged in any buying or selling activity.
Additionally, countries' own funding needs accelerated the reduction in U.S. Treasury holdings. Some official investors sold U.S. Treasuries to raise liquidity, alleviating fiscal and exchange rate pressures. For instance, the blockage of the Strait of Hormuz disrupted crude oil export routes for Gulf oil producers, leading to a sharp drop in oil revenues and a sudden increase in fiscal pressure. Countries like Saudi Arabia and the United Arab Emirates reduced their holdings that month, liquidating U.S. Treasuries to cover fiscal shortfalls. Meanwhile, countries like India and Turkey, facing pressure on their local currencies, may have sold reserve assets such as U.S. Treasuries for foreign exchange intervention.
From an investment allocation perspective, changes in the interest rate environment have increased the commercial incentives for investors globally to adjust their holdings. Since the beginning of 2025, the Federal Reserve has maintained restrictive interest rate levels for much longer than market expectations, keeping prices for long-duration U.S. Treasuries under sustained pressure.
For sovereign investors who prioritize the safety and liquidity of foreign exchange reserves, moderately shortening duration and increasing allocations to short-term Treasury bills or money market instruments constitutes a commercially logical risk management practice.
It is worth noting that the situation in the Middle East eased somewhat in April. After a phase of decline in late March, the U.S. Treasury holdings of foreign official and international accounts at the New York Fed showed signs of stabilization and recovery in April. High-frequency custody data from the Federal Reserve indicates a noticeable rebound in holdings by foreign official investors in April, suggesting that the reduction in March was a phase of market volatility that should not be overinterpreted.
Overall, the reduction in China's U.S. Treasury holdings in March resulted from the convergence of multiple short-term factors, aligning with the direction of changes in holdings by other major economies and not a phenomenon unique to China.
Comments