Calls for China to gradually reduce its exposure to US dollar assets are growing louder as Washington’s national debt continues to set records, reigniting persistent worries over the long-term sustainability of an investment formerly considered rock solid.
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“Although US Treasuries have not yet reached the default threshold, their expansion is unsustainable,” researchers from the Bank of China wrote in the latest issue of China Money, a publication supervised by the People’s Bank of China, the country’s central bank.
With this concern in mind, China has been trimming its US Treasury holdings for three consecutive months, while keeping them roughly unchanged at the US$756 billion level in June, according to data released on Friday by the US Treasury Department. This remains the lowest level since March 2009.
The researchers noted that US economic growth would be unlikely to offset rising debt from persistent budget and trade imbalances, warning that US President Donald Trump’s efforts to narrow the trade deficit could curb global demand for the US dollar and undermine the currency’s international role.
This, they said, would put the country in a “tug-of-war”, oscillating between its economic and monetary priorities.
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“Uncertainty over tariff, tax and fiscal reforms, coupled with a potential US dollar credibility crisis and speculation over the Mar-a-Lago Accord, could heighten volatility in the US Treasury market,” they said.
“[We need to] gradually adjust US Treasury holdings and appropriately increase reserves of gold, key resources and strategic materials.”