Chinese and US debt drops below $1 trillion mark for first time in 12 years

The US Treasury building in Washington, DC

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China’s holdings of U.S. debt fell below $1 trillion for the first time in 12 years amid rising interest rates that made Treasuries potentially less attractive.

Continuing a trend that began in early 2021, China’s U.S. government debt portfolio in May fell to $980.8 billion, according to Treasury Department data released Monday. That’s down nearly $23 billion from April and nearly $100 billion, or 9%, from the previous month.

It is also the first time since May 2010 that China’s assets have fallen below the $1 trillion mark. Japan is now the largest holder of US debt with $1.2 trillion.

The debt drop comes as the US Federal Reserve raised rates to keep inflation from running at its fastest pace since 1981. When rates rise on bonds, prices fall, which means a loss in capital for investors who sell the bonds before maturity.

The decline in China’s share was also attributed to Beijing’s work to diversify its foreign debt portfolio.

The benchmark period came before the Fed raised benchmark overnight borrowing rates by 0.75 percentage points in June; there is another increase of the same size probably next week.

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