China Wants Fewer US Treasuries. What's the Play?

China holds more US Treasuries than almost anyone on Earth — and a prominent Beijing research institute just argued it should hold fewer.

A report published Friday by Sun Jiaqi of Renmin University's International Monetary Institute is drawing quiet but significant attention in financial circles. Its central argument: China's foreign exchange reserves — the world's largest at roughly $3.2 trillion — have grown beyond what's necessary, and trimming them to a "moderately ample" level could help accelerate the internationalization of the yuan. The two goals, the report suggests, are not just compatible. They're strategically linked.

Why This Report, Why Now

This isn't an ordinary academic paper. Renmin University's International Monetary Institute has a track record of floating ideas that later find their way into policy discussions at the highest levels of the Chinese government. In Beijing's policy ecosystem, think tank reports often serve as trial balloons — a way to test public and market reaction before official positions are announced.

The timing matters. Donald Trump's return to the White House has reignited trade tensions with China, and tariff escalation is back on the table. Beijing has watched Washington use dollar-denominated financial infrastructure as a coercive tool — most visibly against Russia after 2022. Reducing dependence on US Treasuries isn't just a financial decision; it's a geopolitical hedge.

The report outlines a two-part vision: reduce holdings of dollar assets, particularly US Treasuries, while simultaneously pushing more countries to hold and transact in yuan. The logic is straightforward — if China can shift even a fraction of global trade and reserves into yuan, it reduces the leverage Washington holds over Beijing through the financial system.

The Gap Between Ambition and Reality

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But the obstacles are formidable, and most analysts know it.

Selling US Treasuries at scale is a trap of China's own making. Any large-scale divestment would push Treasury prices down, eroding the value of China's remaining holdings. Markets would likely interpret the move as a hostile signal, triggering volatility that could hurt Chinese exporters through a stronger yuan. It's the financial equivalent of threatening to burn down a house while still living in it.

Yuan internationalization faces its own structural ceiling. According to Bank for International Settlements data, the yuan accounts for roughly 7% of global foreign exchange trading — compared to the dollar's 88%. The gap isn't closing fast. A truly international currency requires open capital markets, exchange rate flexibility, and — critically — trust in rule of law. China has been reluctant to fully deliver on any of these preconditions, and for understandable domestic reasons: capital account liberalization means accepting less control over money flows in and out of the country.

Some economists push back harder. They argue that reducing reserves — regardless of composition — sends the wrong signal to markets. Foreign exchange reserves function as a crisis buffer and a sovereign credit signal. Defining "moderately ample" is itself contested terrain, and China has been burned before by appearing financially vulnerable.

What It Means for Investors and Policymakers

For global investors, the report raises a scenario worth stress-testing even if it's not imminent. A sustained Chinese divestment from US Treasuries would put upward pressure on US yields, raising borrowing costs across the board. It would also inject volatility into emerging market currencies that trade in China's orbit — the Korean won, the Malaysian ringgit, the Thai baht among them.

For policymakers in Washington, the report is a reminder that China's financial leverage is a two-way street. The US can threaten to weaponize the dollar system, but China can threaten to destabilize the Treasury market. Neither side wants to pull the trigger, which is precisely why both sides keep pointing the gun.

For businesses operating across the US-China divide, the longer-term implication is a gradual bifurcation of financial infrastructure — more yuan-denominated contracts, more pressure to maintain dual-currency capabilities, more complexity in hedging strategies. This isn't a tomorrow problem. But it's no longer a distant-future problem either.