China urges banks to reduce US Treasury exposure as Western allies boost purchases

Friday 27 February 2026 - 15:00

By: Dakir Madiha

China urges banks to reduce US Treasury exposure as Western allies boost purchases

China’s financial regulators have instructed domestic banks to cut their investments in US Treasury securities, signaling an effort to reduce exposure to American debt as global financing dynamics shift. Bloomberg reported that Beijing issued the directive through informal “window guidance,” advising banks to limit new purchases and trim existing holdings due to concentration risks and market volatility. The measure reportedly does not apply to sovereign reserves managed by the People’s Bank of China.

Market reaction was cautious. The US dollar index fell by about 0.8 percent on the day of the report, while the 10-year Treasury yield climbed to 4.25 percent before easing later. According to Bloomberg, Chinese banks hold roughly 298 billion dollars in US dollar-denominated bonds, though it remains unclear how much of that total represents Treasuries.

The move continues a decade-long pullback from US debt markets. Treasury Department data show China’s holdings dropped to 683.5 billion dollars in December 2025, about half of their 2013 peak. The country sold around 110 billion dollars in Treasuries last year alone, marking its sharpest annual reduction since records began. Analysts say China’s decoupling reflects concerns over potential US financial sanctions after Russia’s invasion of Ukraine and broader efforts to diversify reserves.

While some economists interpret the policy as part of China’s de-dollarization strategy, others believe it reflects a shift in how foreign assets are held rather than a full retreat from the dollar system. Brad Setser of the Council on Foreign Relations noted that Chinese state-owned banks purchased over 100 billion dollars in foreign exchange in December, indicating continued dollar accumulation through alternative channels.

As Beijing steps back, US allies have significantly expanded their Treasury investments. In 2025, allied nations added nearly 464 billion dollars in Treasury holdings — the highest annual increase since 2016. The United Kingdom led with 189.6 billion dollars in net purchases, followed by Canada and Japan. Total foreign holdings reached 9.3 trillion dollars by year’s end.

Analysts warn that growing dependence on allied financing presents new risks. If those nations slow their purchases or shift toward risk‑averse positions, Washington could face higher borrowing costs and renewed pressure on the dollar’s dominance.