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China’s much-cited exit from US government bonds regularly causes a stir. But a closer look reveals that there is no sign of an abrupt withdrawal or even a global exodus from the US Treasury market. “This is more a case of long-term, strategic diversification by a number of countries,” says Thorsten Fischer, Managing Director and Head of Portfolio Management at Moventum AM. “And so far, this has had only a limited impact on the global financial system.”

China has effectively halved its holdings of US government bonds since 2013 and has evolved from once being the largest creditor to an increasingly diversified investor. “However, the latest regulatory warning from Beijing urging banks with high Treasury quotas to limit their exposure does not signal a paradigm shift,” says Fischer. “It primarily reflects classic risk management.” Chinese regulators want to reduce concentration and volatility risks, while geopolitical tensions are creating additional uncertainty.

Despite this decline, the US bond market remains remarkably stable. “Tight bid-ask spreads, low volatility, and smooth auctions show that there is no sign of a buyer’s strike,” says Fischer. Capital flows also argue against a retreat. Although the share of foreign investors in US government debt has fallen from around 50 percent at the beginning of 2015 to around 31 percent, “in absolute terms, foreign investors still hold a record volume of around USD 9.4 trillion,” says Fischer.

The current trend therefore reflects less a coordinated global exit than a shift in focus. While China, Germany, France, and the United Arab Emirates are moderately reducing their holdings, other investors are expanding their positions: “Canada recently increased its holdings by around US$53 billion, Norway by US$25 billion, and Saudi Arabia by US$14 billion,” says Fischer. “Demand remains broadly supported for the time being.”

Political uncertainties under President Trump – such as the controversy surrounding Greenland – have also caused occasional irritation in Europe. Some pension funds reduced their Treasury holdings. “However, this has not had any systemic impact so far,” says Fischer. “The market absorbed these adjustments without any noticeable distortions.” Another stabilizing factor is China’s persistently high trade surplus, which recently amounted to around USD 1.2 trillion. These surpluses continue to fuel capital exports. Instead of being repatriated to the domestic market, considerable funds are flowing into foreign assets – yield considerations outweigh the desire to repatriate the funds in full.

In addition, official US data may underestimate China’s actual exposure. Estimates suggest that actual holdings remain above one trillion US dollars, partly held through European custodians such as Belgium. “And strategically, there is still no alternative to the US dollar,” says Fischer. “The lack of sufficiently large, liquid, and secure asset classes in other currencies significantly limits Beijing’s scope for diversification.”

In this respect, a structural trend toward gradual diversification is real, but an abrupt global shift away from the US bond market is not. “As long as the US has current account deficits and exports dollar liquidity, there will be buyers for US Treasuries,” says Fischer. “The key question is therefore not whether demand exists, but where it comes from.” Thus, the movements are less of a risk to market stability and more of an ongoing rebalancing within a global capital market system that remains robust.