CHINA'S CAMOUFLAGE OF ITS MASSIVE US TREASURIES HAS EVERYONE FOOLED

The post title is as audacious as Prof Jeffrey Sachs' prediction in 2019. Sachs' boast has about 3 years to go and there are no signs of anywhere near realisation. This post has about 15 minutes read time to try to convince you.

In the past few years you have been pounded by media with one story after another of the RMB being used in oil trades and countries agreeing to invoice in RMB. It drives the sense of a serious rise in the adoption of the yuan as a world reserve currency.  Let's look at one metric to see the major currencies share as reserve currency in 2019 and 2025.

True enough, USD has shedded 4.56%, but RMB has gained by only 0.09%. The shift to RMB stalled at the front door of Beijing's capital controls. The shifting allocation of global reserves away from USD is surprisingly into the smaller currencies This is a phenomenon called the "Stealth Erosion of Dollar Dominance." The driver is technology. The digitization of foreign exchange markets completely changed the math for central banks. Previously it was expensive and operationally troublesome to trade in minor currencies which had to be computed via a third currency. Old trading limitations have disappeared and central banks diversified into minor currencies.

All economics professors and subject expertise embrace the core of Sach's comment about US treasuries held by China -- that China is moving fast to reduce its holdings to minimise geopolitical risks as US is increasingly seen to be trigger happy to weaponise the dollar and SWIFT, China has switched substantially to gold, that China is leading BRICS+ to pivot to a new reserve currency and dedollarisation is a matter of time.
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Every time I see someone discuss this, without exception they point to People's Bank of China's drastic shedding of US treasuries. The data presented of Chinese holdings of US treasuries is :

Indeed, the data confirms what almost everyone is saying. China has halved its more than USD 1 trillion in US treasuries by 50% and indeed the shedding of US treasuries seems to commence in the year 2022 when US sanctioned Russian assets. The knee jert explanation is China understandably reacted to the changing geopolitical risks. 

China's peak holding of US treasuries was in 2013 where it had about USD1.3Tn. It fell substantially in 2015/2016 due to pressure on RMB and PBOC intervened to protect the exchange rate, buying back the local currency.

Chinese central bank, just like MAS, has never disclosed details of their Official Foreign Reserves. So I find it strange. Don't anyone ask where the data comes from? Is it WYSIWYG?

Data on US treasuries comes from US official records extracted from a tracking system called "Treasury International Capital (TIC) System". US treasuries are natively digital securities, they cannot legally or physically leave the US financial system. They do not sit with a local custodian in Singapore, or China.. Instead, they leverage a hierarchical global custody chain such as Mellon Bank, BNY, Citi, Fed, etc. 

TIC report has a location blindspot. It aggregates by Country. So if all the custodians aggregate a US$200Bn holding by Singapore, we still don't know how much is MAS, GIC, Temasek or local and foreign banks in the country. Or if a Singapore company has some holdings held by it's Cayman Island subsidiary, TIC will report it under Cayman Island.

Large international custodians and International Central Securities Depositories (ICSDs) operate what is called Omnibus Accounts. It is a single securities account that pools the holdings of multiple underlying clients. Euroclear (Belgium) and Clearstream (Luxembourg) are ICSDs. TIC report shows holdings of US treasuries using Euroclear as custodian are reported as Belgium's, and under Clearstream as Luxembourg's. PBOC's holdings of US treasuries kept at Euroclear will not be report under China.

Brad Setser is a senior fellow at the Council on Foreign Relations, where he writes analysis and commentary on global trade and capital flows. He does deep analysis on TIC data and suggests China has moved custodianship of a large portion of US treasuries to Euroclear. His modelling is based on 3 pillars of evidence - (1) mathematical symmetry between China's fall and Belgium's surge; (2) Massive tranches of Treasuries were being bought in other global financial hubs like London, Paris, and Hong Kong, and then abruptly transferred after the fact into Belgian custody. This pipeline mirrored China's SAFE's (State Administration of Foreign Exchange) known behavior of purchasing assets through third-party global dealers to conceal its identity; and (3) China has 7.5% shares in Euroclear with a seat on the board.

(Note: GIC has 5% ownership of Euroclear.)

Setser reports China started to camouflage their US securities since 2013 to minimise geopolitical risks. This was speeded up in 2022 after seeing US sanctions on Russia. As Euroclear becomes too obvious by now, Setser reports China has now included custodians in Canadian, France, and UK. 

Setser estimates PBOC holdings of US Treasuries (Bills + Bonds) is currently about USD1.1 trillion. The last time PBOC officially published details on their OFR was in 2019 when it mentioned the policy to hold 50%-55% of their OFR in USD of which about 40% is in treasuries. PBOC's OFR as at July 2026 is USD3.42Tn. An allocation of 40% of that = USD1.37Tn. The difference USD270Bn with Setser is most likely adjustment for shifts to US Agency securities which PBOC has mentioned was meant to have a better ROI.

When financial media outlets report that "China's U.S. bond holdings hit an 18-year low," they are looking strictly at the unadjusted "China" country line in the TIC report. They miss the Agency and Treasury bonds China holds offshore under Omnibus Accounts.

The question one may ask is if geopolitical risk is so important, why are they still holding on to the USD assets. First, China is not eradicating geopolitical risks. No one can. China is minimising the risks by camouflaging their data. Secondly, this has got to do with the "carry trade" discussed in my previous post. PBOC has to manage the "investing" currency. With the monstrous carry trade, US Treasuries remain the best risk-free assets with the deepest market.  

China's holding of US Treasuries is still very much close to 2019 levels when Jeffrey Sachs made that audacious prediction. My follow up post will show that China's holdings of US Treasuries is in fact much higher due to camouflage via the "shadow banking" practice.

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CHINA'S CAMOUFLAGE OF ITS