Mounting U.S. Debt and Growing Dependence
In recent years, the United States has faced a mounting debt crisis, with total national debt approaching $37.5 trillion, increasing by roughly $6 billion daily. Interest payments alone account for 10% of the federal budget, exceeding $1 trillion in fiscal year 2024.
The U.S. government continues to borrow heavily to sustain operations, with a projected deficit of $1.8 trillion this year. Historically, Congress has raised the debt ceiling to avoid default, most recently passing a law in September 2025 to maintain market stability.
A potential default would trigger global market turmoil, as public debt continues to outpace GDP growth, raising long-term economic concerns.
China’s Strategic Shift in Treasury Holdings
As one of the largest foreign holders of U.S. Treasuries, China has historically played a stabilizing role. However, in recent years, China has gradually reduced its holdings.
By July 2025, China’s U.S. Treasury holdings fell to $730.7 billion, the lowest since 2008, down $25.7 billion from June. At its peak in 2011, China held over $1.3 trillion. While China’s total foreign exchange reserves are around $3.32 trillion, the proportion held in U.S. debt is shrinking, as funds shift to gold, institutional bonds, and infrastructure investments.
In contrast, Japan and the U.K. increased holdings, with Japan at $1.1514 trillion and the U.K. at $899.3 billion in July 2025. Total foreign holdings of U.S. debt reached a record $9.16 trillion, yet China’s reduction has raised concerns over U.S. financing costs and market stability.
U.S. Efforts to Maintain China’s Participation
U.S. officials have actively engaged China to stabilize Treasury markets:
- Treasury Secretary Janet Yellen emphasized in March 2023 that changes in China’s holdings directly impact U.S. financial markets. She visited Beijing in July 2023, initiating discussions on global economic stability and financial cooperation, followed by another visit in April 2024 focusing on excess production and economic dialogue.
- Commerce Secretary Gina Raimondo also visited China, emphasizing trade, investment, and technology cooperation, signaling a pragmatic shift from prior hardline approaches. While these visits did not reverse China’s divestment, they opened channels for communication.
The overarching goal of these high-level visits was to ensure China’s continued role as a major creditor and avoid excessive volatility in U.S. debt markets.
Why China Is Reducing U.S. Treasuries
China’s reduction of U.S. Treasury holdings since April 2022 reflects a strategic, measured approach:
- Low yields: U.S. debt offers relatively modest returns.
- Rising geopolitical risk: Tensions, particularly in the Taiwan Strait, increase uncertainty.
- Diversification of reserves: China is shifting towards gold, institutional bonds, and infrastructure projects, enhancing financial autonomy and international RMB use.
By September 2025, China’s gold reserves reached 2,302 tons (~74.06 million ounces), a continuous 11-month increase, ranking sixth globally. These purchases, conducted via the Shanghai Gold Exchange and international markets, help hedge dollar risk and strengthen China’s position in global financial systems.
U.S.–China Interdependence and Strategic Tension
The U.S. debt problem is structural, with fiscal reform often stalled by Congressional gridlock. While new administrations promise deficit reduction, actual implementation remains challenging.
China’s gradual divestment heightens U.S. financing pressures, forcing reliance on short-term debt issuance and increasing rollover risks. This underscores the complex interdependence of U.S.–China economic relations: the U.S. seeks continued Chinese investment while simultaneously maintaining a tough stance in geopolitical hotspots.
For context, historical voices like Robert Kagan have warned the U.S. against ceding influence, framing potential challenges from rising powers like China in terms of strategic caution. While such perspectives emphasize military and political concerns, the economic dimension — particularly China’s strategic Treasury adjustments — is increasingly central to global stability.
Diversification and Financial Autonomy
China’s approach reflects long-term planning:
- Multi-currency reserve management: Expanding gold reserves and increasing RMB internationalization.
- Alternative asset allocation: Infrastructure investments and cross-border financial projects.
- Global hedging strategies: Using gold and other instruments to reduce reliance on U.S. debt.
Analysts suggest that as China grows into the world’s largest economy, its gold reserves could surpass 8,000 tons, further challenging dollar hegemony.
Conclusion: Navigating a Complex Economic Landscape
China’s measured reduction of U.S. Treasury holdings represents a careful balance between risk management and strategic leverage.
While the U.S. seeks stability in its debt markets, China is asserting financial autonomy, diversifying reserves, and preparing for a multipolar economic order.
The interplay between debt cooperation and geopolitical tensions — particularly in regions like the Taiwan Strait — highlights a new era of nuanced interdependence, where rules, reserves, and risk management dictate strategic advantage.
References
- U.S. Treasury Department Data (2025)
- People’s Bank of China Reserve Reports
- Natixis Global Economic Research
- Statements from Janet Yellen and Gina Raimondo
