For the first time in 12 years, China’s holdings of U.S. debt have fallen below $1 trillion due to rising interest rates that may have made Treasury bonds less appealing.
According to Treasury Department data released on Monday, China’s portfolio of U.S. government debt decreased to $980.8 billion in May, continuing a trend that started in early 2021. That represents a drop of almost $23 billion from April and a drop of almost $100 billion, or 9%, from the same month last year.
China’s holdings fell below the $1 trillion threshold for the first time since May 2010. With $1.2 trillion, Japan is currently the largest holder of U.S. debt.
As the U.S. Federal Reserve raises rates to slow inflation from reaching its highest rate since 1981, debt levels are falling. Bond prices fall when interest rates rise, which results in a capital loss for investors who sell the bonds before they mature.
Beijing’s efforts to diversify its portfolio of foreign debt have also been linked to the decline in China’s share.
Prior to the reporting period, the Fed increased the benchmark overnight lending rate by 0.75 percentage point in June. Another increase of the same magnitude is anticipated for next week.