China Didn’t Dump U.S. Debt — It Just Hid It in Canada
(SeaPRwire) – By: Raymond Vance
The Treasury Department’s latest data paints a dramatic picture. China has slashed its direct U.S. Treasury holdings from $1 trillion down to just $591 billion — the lowest level in 18 years. The headline grabbed attention worldwide. It also misses the point entirely.
Look past the official numbers. In August, China’s direct Treasury stash hit $591 billion, down from $700 billion a year earlier. But Canada’s holdings surged to $465 billion from just $169 billion five years prior. Belgium jumped from $228 billion to $490.5 billion in the same window. When you factor in bonds backed by federal housing agencies, the gap between what Washington reports and what actually exists becomes glaring. The official custodial system simply cannot attribute overseas-held securities to their true owners.
Brad Setser at the Council on Foreign Relations has tracked this pattern since around 2020. He notes a massive rerouting of Treasuries into custodians across the United Kingdom, France, Luxembourg, and Belgium. Combining China’s direct holdings with those hidden in Canada and European centers yields an estimated total between $300 billion and $500 billion. Even a conservative adjustment covering only Canada, Luxembourg, and France since 2022 puts China’s effective exposure at roughly $300 billion. Setser estimates China still allocates 50 to 55 percent of its reserve portfolio to U.S. financial assets. Both the Treasury and Agency portfolios require adjustment for bonds parked under non-U.S. custodians. That opacity introduces genuine uncertainty into any assessment of Chinese capital positioning.
The macro backdrop makes this maneuver almost predictable. China posted a record $1.2 trillion trade surplus in 2025 — three times the growth rate of global goods trade. Through the first nine months of 2026, the surplus already reached $938 billion with expectations of another milestone year. The People’s Bank faces a mechanical problem: it must recycle those dollars somewhere. Export-led growth now sustains the economy as the property sector deteriorates and domestic demand falters. At the same time, the Ukraine conflict and subsequent Russian sanctions gave Beijing every incentive to diversify toward gold and alternative assets while maintaining a dollar foundation. Trump-era trade escalation further pushed decoupling rhetoric, yet the capital flows tell a different story. China is not abandoning Treasuries. It is disguising them.
The implication for U.S. debt markets is subtle but real. If Beijing is systematically shifting its holdings into non-U.S. custodial networks to mask its true exposure, then transparent demand from the second-largest foreign holder is eroding. Markets price visibility. Opacity creates yield premiums. Every round of de-dollarization announcements amplifies that risk. The Treasury Department acknowledges its data collection relies on U.S.-based custodians and broker-dealers. It admits that overseas custody accounts may not reflect the actual beneficial owner. That structural blind spot has existed for years. China is simply exploiting it more aggressively now.
The longer-term question concerns sovereign credit signaling. A major reserve currency holder deliberately obscuring its position sends mixed signals. It says one thing to markets and another in diplomatic channels. The United States benefits from transparency in foreign ownership patterns. Hidden positions complicate yield curve modeling and fiscal planning alike. China’s strategy is rational from a risk-mitigation standpoint — it reduces the political vulnerability of concentrated Treasury holdings while preserving yield income. But the cumulative effect of multiple central banks adopting similar concealment tactics could gradually reprice the liquidity premium embedded in U.S. debt. Beijing may not be selling its Treasuries. It is just making sure nobody can easily count them anymore.
Author bio: Raymond Vance is a senior macro-economist and consultant to central banking policy research working groups, specializing in sovereign debt markets and international reserve dynamics.