Viability of US dollar assets reflected in China’s Treasury holdings adds woos to the worries.

Aug 2025 : China’s Calls to gradually reduce its exposure to US dollar assets are growing louder as Washington’s national debt continues to set records, reigniting persistent worries over the long-term sustainability of an investment formerly considered rock solid. “Although US Treasuries have not yet reached the default threshold, their expansion is unsustainable”, researchers from the Bank of China wrote in the latest issue of China Money, a publication supervised by the People’s Bank of China, the country’s central bank. With this concern in mind, China has been trimming its US Treasury holdings for 03 months in successions, while keeping them roughly unchanged at the US$756 billion level in June, according to data released on Friday by the US Treasury Department. This remains the lowest level since March 2009.

The researchers noted that US economic growth would be unlikely to offset rising debt from persistent budget and trade imbalances, warning that US President Donald Trump’s efforts to narrow the trade deficit could curb global demand for the US dollar and undermine the currency’s international role.

This, they said, would put the country in a “tug-of-war”, oscillating between its economic and monetary priorities. “Uncertainty over tariff, tax and fiscal reforms, coupled with a potential US dollar credibility crisis and speculation over the Mar-a-Lago Accord, could heighten volatility in the US Treasury market”, they said. “We need to adjust US Treasury holdings gradually, and appropriately increase reserves of gold, key resources and strategic materials”.

Concerns over the long-term viability (dollar’s status is increasingly under threat due to the reluctance of other countries, especially China, to fully rely on the US currency, as well as the rise of digital currencies, stable coins and alternative global payment systems, and economic mismanagement in Washington) of US debt have grown after the passage of Trump’s signature “One Big Beautiful Bill Act”, which raised the federal debt ceiling while adding an estimated US$3.4 trillion to the deficit through 2034. The nomination of Stephen Miran to the Federal Reserve’s board of governors has also stoked fears over the central bank’s continued independence.

Despite these sources of uncertainty, US Treasury Secretary Scott Bessent told Bloomberg earlier this week that he is thinking about the legacy he wants to leave upon departing the office, of which reasserting the US dollar’s supremacy would be part.

In their article, the Chinese analysts also warned that the share of US Treasuries held by non-bank financial institutions and the private sector is increasing, making them more sensitive to changes in liquidity and risk expectations. “Any sudden negative shock could trigger chain reactions across markets, asset classes and even countries, exacerbating financial market instability”, they said.

They have suggested setting up a cross-market early warning system to curb potential market spillovers and encouraged financial institutions to use derivatives, including yuan options, to hedge currency and interest rate risks. “We should improve the dynamic monitoring of cross-border capital inflows and outflows to prevent ‘hot money’ movements from triggering systemic risks”, the analysts said.

Japan, the largest foreign holder of US Treasuries, added its holdings from US$1,135 billion to US$1,147.6 billion in June, while the holdings of the UK, the second-largest holder, rose from US$809.4 billion to US$858.1 billion.

Mar-a-Lago Accord –

The Mar-a-Lago Accord is a proposed economic and trade initiative of the Donald Trump administration during his second term. Named after Trump’s Mar-a-Lago estate in Florida, the Accord is a blueprint for restructuring global trade and monetary relations. Its core goal is to devalue the dollar while preserving its role as the world reserve currency, a careful balancing act intended to avoid the contradictions described in the Triffin paradox.

The plan seeks to reduce the United States trade deficit, restore domestic manufacturing, and realign international economic relationships. It proposes to achieve these aims through the use of tariffs, currency and capital measures, and trade agreements tied to national security.

Drawing inspiration from the 1944 Bretton Woods Agreement and the 1985 Plaza Accord, the Mar a Lago Accord envisions a similarly large scale realignment of global trade and currency systems.

As of early 2025, the Mar-a-Lago Accord has not been implemented and remains in the earliest stages of negotiation. Its success is highly uncertain, and many of its provisions are deliberately kept confidential to avoid disrupting delicate international talks.

Stephen Miran – Trump’s newly appointed chairman of the Council of Economic Advisers – laid out the key ideas behind the strategy and discussed possible ways to implement it.

Any such plan could have weighty implications for China, as today’s Chinese economy is often compared to the Japanese economy of the 1980s. Many in Japan still blame the Plaza Accord for sparking the crash that led to the country’s “lost decades” of stagnant growth.

This explainer unpacks the policy rationale behind a possible Mar-a-Lago Accord and its potential impact on China.

The core of Miran’s plan involves two policy approaches designed to achieve a weaker US dollar.

The first option is a multilateral agreement – in other words, a Mar-a-Lago Accord – in which major economies such as China, Japan and the European Union agree to sell dollar assets and swap short-term US treasuries for century bonds.

This dual mechanism would weaken the dollar by increasing its supply while containing yield spikes. The US could offer other countries tariff relief and security guarantees to secure their compliance with the plan, Miran suggested.

If the US fails to achieve multilateral cooperation, it could take unilateral action to drive reserve managers away from the dollar, such as by imposing fees on foreign treasury holdings.

The plan would need to be carefully sequenced to work, with the US first using tariff pressure to create negotiating leverage and then gradually implementing currency adjustments, Miran acknowledged.

Team Maverick