China’s Foreign Reserve Shift: Less US Treasuries, More Gold and Diversification

Amidst a backdrop of evolving international relations and economic strategies, global financial players are closely observing how major economies manage their substantial foreign reserves. China, holding one of the world’s largest reserve pools, is navigating these complex currents, leading to subtle but significant adjustments in its investment approach, particularly concerning its holdings denominated in US dollars.

Reassessing US Debt Holdings Amid Geopolitical Shifts

Concerns regarding geopolitical friction and the predictability of Washington’s policies have prompted a discreet reduction in China’s exposure to U.S. Treasury bonds. This shift reflects a broader strategy to mitigate risks associated with heavy reliance on dollar-denominated assets. High-level officials within China’s currency regulation body initiated reviews earlier this year to understand the potential fallout from structural changes in the U.S. mortgage market, specifically concerning entities like Fannie Mae and Freddie Mac.

While China’s vast $3.2 trillion reserves remain predominantly invested in dollar assets, recent actions signal a deliberate move towards gradual diversification. Options reportedly under consideration have included mortgage-backed securities, potentially carrying implicit U.S. government backing, and even exploring equity positions in key U.S. housing finance institutions.

A Strategy of Measured Adjustment

Despite official statements, like that from People’s Bank of China Vice President Zou Lan asserting the portfolio’s existing diversity, the underlying actions suggest a continuous adaptation to global risks. The motivation appears rooted in safeguarding assets against potential financial repercussions should international disputes escalate. This concern gained traction following the imposition of significant tariffs by the current U.S. administration under President Donald Trump, fueling speculation about potential financial countermoves from Beijing.

However, sources suggest that a large-scale sell-off of U.S. debt is not the chosen path. Instead, China is pursuing a more nuanced strategy of slow rotation. This approach, sometimes described locally as “tengnuo” – akin to agile maneuvering on a tightrope – aims to maintain a careful balance between liquidity, asset security, and investment yield, all while avoiding major disturbances in global financial markets.

Diversification Towards Gold and Alternative Assets

The data indicates a tangible shift. Reports suggest that between early 2022 and the end of 2024, China’s official holdings of U.S. Treasuries were reduced by over 27%, a notably faster pace than in previous years. As an alternative, investments in agency bonds, such as those issued by Fannie Mae, have reportedly increased, offering slightly better returns and potentially less direct political sensitivity.

Simultaneously, China’s state investment arms, like Rosewood Investment based in New York, have been channeling funds into private assets, real estate, and infrastructure projects. The freezing of Russia’s dollar reserves following its invasion of Ukraine served as a stark reminder of the vulnerabilities associated with assets held within the reach of Western financial systems, likely accelerating China’s diversification efforts.

The Growing Importance of Gold

Gold has emerged as a key component of this diversification strategy. Official data reveals that China’s gold reserves have surged by 18% since 2022. This precious metal now constitutes approximately 6% of the nation’s total reserves, a significant increase from just 2% a few years prior. This highlights a clear move towards assets perceived as safer stores of value outside the traditional dollar system.

Asset Class	Trend	Rationale
U.S. Treasuries	Gradual Reduction	Mitigate geopolitical & political risk
Gold	Significant Increase	Safe haven, diversification from USD
Agency Bonds (e.g., Fannie Mae)	Increased Interest	Yield pickup, less direct political exposure
Private Assets/Infrastructure	Increased Allocation	Diversification, potential higher returns

Strategic Repositioning and De-Dollarization Considerations

Despite the diversification drive, the unparalleled liquidity of U.S. Treasury bonds means they remain a core holding. Nevertheless, China has initiated steps to manage its reserves with reduced systemic exposure to the U.S. This includes allocating funds to asset managers based in Asia and relocating some operational functions to Hong Kong. Shortening the duration of bond holdings and utilizing different custodians are other tactics employed to lessen dependency.

Political anxieties also play a role. Concerns linger, however improbable, about scenarios involving forced exchanges of existing debt for extremely long-term bonds. This perceived threat has prompted advisors in Beijing to explore more fundamental de-dollarization strategies, including potentially holding larger reserves in other major currencies.

Zerlina Zeng, a strategist at CreditSights, views the move towards assets like the Swiss franc and gold as logical steps. “China is doing the right thing by strengthening its base in gold,” she noted. Ultimately, the objective isn’t a complete flight from the dollar but a calculated effort to prevent over-concentration from leading to substantial losses in an increasingly uncertain world.