China urged to cut forex reserves and reduce US Treasury holdings

Monday 23 March 2026 - 09:50

By: Dakir Madiha

China urged to cut forex reserves and reduce US Treasury holdings

A Chinese academic report is calling for Beijing to scale back its massive foreign exchange reserves, including its holdings of US Treasury bonds, arguing that the rising global role of the yuan could replace many functions traditionally supported by large dollar reserves.

The report, published by the International Monetary Institute at Renmin University of China on March 22, recommends reducing reserves to a “moderately adequate” level of about 11.49 percent of GDP. China’s current reserves stand at around $3.43 trillion, the largest in the world.

The recommendation comes as the yuan strengthens and China continues to reduce its exposure to US debt. The currency has gained about 2 percent against the dollar this year, reaching its highest level since early 2023. The appreciation has been supported by strong exports, a weaker US dollar and growing foreign investment in Chinese assets.

Authorities have taken steps to manage the currency’s rise. In late February, the People’s Bank of China removed a 20 percent reserve requirement on forward foreign exchange contracts in an effort to slow the yuan’s appreciation.

China’s leadership has made clear its ambition to elevate the yuan’s global role. A policy article published in Qiushi, the Communist Party’s main journal, called for building a “strong currency” capable of achieving reserve status. The share of China’s trade settled in yuan has risen to about 30 percent, up from 5 percent in 2017. Trade with Russia has accelerated this shift, with more than 90 percent of bilateral transactions now conducted in local currencies.

At the same time, China has steadily reduced its holdings of US Treasury securities. Holdings fell to $683.5 billion at the end of 2025, down $75.5 billion from a year earlier and roughly half the peak level recorded in 2013. The decline extends a trend that began in 2018 during heightened trade tensions between China and the United States. China is now the third-largest foreign holder of US Treasurys, behind Japan and the United Kingdom.

Earlier this year, Chinese regulators instructed state-linked banks to cut privately held US dollar bond assets, a move affecting hundreds of billions of dollars. Analysts say the policy reflects concerns about concentration risk and volatility, as well as broader geopolitical considerations. Efforts to reduce exposure to US financial assets have intensified following the freezing of Russian central bank reserves by Western countries in 2022.

Despite these developments, economists say the yuan still faces structural barriers to replacing the dollar as a major reserve currency. It accounts for less than 2 percent of global foreign exchange reserves, according to International Monetary Fund data. China’s partially closed capital account limits the ability of foreign investors to freely move funds, reducing the currency’s appeal for reserve managers.

Some analysts warn that rapidly reducing US Treasury holdings could have unintended consequences. Continued purchases of foreign assets are often used to manage currency appreciation, and a sharp reduction could push the yuan higher, potentially affecting China’s export competitiveness.