China Banks Told to Reduce US Treasury Holdings. Here’s What That Means.

China instructed banks to dial back their holdings of US Treasury debt this week, a move that sparked fresh conversations about “Sell America.”

Chinese regulators said the move was related to volatility and concentration risks in US debt, and it wasn’t framed specifically as a critique of the dollar-led financial system. Yet, market commentators see it, in part, as an update to a broader geopolitical narrative that’s gripped markets in the last year.

Bloomberg reported that China’s banks collectively hold $298 billion in US dollar-denominated bonds, though is not known much of that is made up of US Treasurys versus things like US corporate debt.

The impact on treasury yields has been minimal so far, but economists and market pros say the move raises concerns about future knock-on effects.

Here’s what they’re saying.

Desmond Lachman, American Enterprise Institute

A senior fellow at the economic policy think tank, Lachman has previously raised concerns about the position of the US as a global economic superpower.

He said this week that he is deeply concerned about what China’s decision may mean for the US, particularly as other nations have already begun shifting away from dollar-denominated assets.

“[The US] desperately needs foreigners to keep buying US Treasuries to provide that financing, and the last thing that it needs is for foreigners to start selling their Treasurys,” he told Business Insider, adding that foreign investors hold about 30% of the outstanding amount of US Treasurys.

“The drying up of foreign buying of our government’s bonds could set us up for a bond market and dollar crisis.”

Brad Setser, Council on Foreign Relations

Setster isn’t as concerned about the market implications of China’s move. He sees the decision as a reflection of China’s need to make changes in order to help stabilize its own economy and guard against volatility from the US after struggling in recent years.

“Global investors should consequently be paying much more attention to the flows tied to China’s currency management,” he advised. “Despite the recent warning, my strong suspicion is that Chinese state institutions will struggle to find good alternatives to the Treasury market if they are buying $50 billion or more in the market a month to control the pace of yuan appreciation.”

Jai Kedia, Cato Institute

Kedia, an economist at the libertarian think tank, shares Setser’s perspective that investors shouldn’t regard China’s decision as a geopolitical development. He told Business Insider that while he expects China to continue selling off its US Treasurys, it likely won’t yield a sizable negative impact for the US.

“People have a way overestimated opinion of how much value of US government debt China actually holds,” he stated. “The value isn’t anywhere near enough to crash our markets or anything like that.”

Kedia acknowledged that a massive offloading of government bonds would likely impact the market, but he added that he doesn’t see that as likely

Liqian Ren, WisdomTree Asset Management

Ren, who serves as director of modern alpha at asset manager WisdomTree, sees it as more explicitly geopolitical than other commentators.

“The move is largely geopolitical, with financial factors secondary,” she said. “China uses US treasury holdings for part of its currency management, making rapid liquidation unlikely. While near-term risks remain low, preparations for potential regional conflict involving Japan or the Taiwan Strait are reinforcing incentives on both sides to reduce financial dependence.”

In her view, China isn’t likely to be a net buyer of US government debt until the two nations reach an equilibrium.

Yan Wang, Alpine Macro

The market research firm’s chief China strategist thinks the regulatory guidance is mostly about risk management. That said, he thinks geopolitical tensions are a factor in China’s decision as well.

“China has been reducing its holdings of US assets—particularly Treasurys—in recent years, and the pace has accelerated sharply since Russia’s invasion of Ukraine,” he said. “Beijing’s core strategic objective is to reduce its vulnerability to potential US sanctions under conditions of severe geopolitical stress.”

Like Kedia, Wang expects China to continue selling its holdings of US government debt. He claims that US Treasurys account for roughly 20% of China’s reserves, likely above the comfort level of its government.