In a recent article for the Council on Foreign Relations, former Treasury official Brad Setser debunked the notion that China is dumping its US bond holdings, which some have speculated is fueling the current bond market rout. Setser argued that while China has sold some Treasurys, it has also been buying up US debt in the form of agency bonds, resulting in a reshuffling of its US debt assets.
Setser pointed out that a large part of China's holdings is not accounted for in official US data. The official data only reflects foreign holdings in US custodians, which means it does not capture US asset holdings that were handed over to third-party management. China's State Administration of Foreign Exchange is known to hold accounts at global bond and hedge funds, as well as private equity firms.
Furthermore, Setser estimated that China's overall US bond holdings have been relatively stable since 2015 when drawing on other sources. He argued that if adjustments are made for Treasuries held by offshore custodians and other factors, China's reported holdings of US assets appear to be basically stable at around $1.8 to $1.9 trillion.
Setser also highlighted that China's reduction in Treasury holdings is not equivalent to a reduction in the share of China's reserves held in US bonds or the US dollar. While China has reduced its Treasury holdings, the sales are much smaller than other data suggest, and China has increased its purchases of US debt in other forms, such as agency bonds.
In conclusion, Setser emphasized that the only significant evolution in China's reserves in the past six years has been the shift into agency bonds. This has resulted in a small reduction in China's Treasury holdings but does not indicate a reduction in the share of China's reserves held in US bonds or the US dollar. Therefore, the notion that China is dumping US bonds and fueling the bond market rout is unfounded.