When China reduced its holdings of US Treasury securities in the spring of 2026, mainstream Washington commentators reflexively reached for the word “routine.” They should not have. What is unfolding is the culmination of a decade-long strategy, methodically engineered to give China the option to weaponize US borrowing costs at a moment of geopolitical maximum pressure.
The numbers are striking. China’s Treasury holdings, which topped $1.3 trillion in 2013, had fallen to $693.3 billion by February 2026, and slid further to $652.3 billion the following month. In March 2026 alone, overall foreign holdings of US. Treasuries fell by $138.4 billion, with seven of the top ten foreign holders, including Japan, China, Belgium, Canada, and France, trimming their exposure simultaneously. Acclaimed economist Mohamed El-Erian flagged the structural shift bluntly: China’s share of the total US Treasury market has dropped to just 7 percent, “a quarter of the 28 percent peak reached 15 years ago,” a decline made even more pronounced, he noted, against “the steady issuance of new securities by the US government.”
The US fiscal model depends on a continuous supply of willing buyers. Washington runs persistent deficits to fund the military, Social Security, federal salaries, and overseas commitments, through perpetual debt issuance. When a creditor of China’s scale steps back, the arithmetic is punishing, leading to higher yields, steeper rollover costs, and a softer dollar amid reduced foreign demand. Economist Peter Schiff was characteristically direct after China advised its banks to reduce Treasury exposure in February 2026:
“Soon, foreign governments and many private investors will be selling US Treasuries. The main buyer will be the Fed, creating inflation that will send consumer prices soaring.”
According to Brad Setser, a former U.S. Treasury official currently with the Council on Foreign Relations, if China completely liquidated its portfolio, long-term interest rates would jump by roughly 30 basis points. Crucially, this estimate only covers the direct market impact, without factoring in the panic it could trigger among other global creditors.
For years, China has been quietly setting up a backup plan. They want to make sure that if they ever decide to walk away from the US dollar, their own economy won’t crash and burn.
Think of it like building a whole new financial neighbourhood so they don’t have to live in America’s house anymore. Here is how they are doing it:
- The Ultimate Global Road Trip: China started a massive project called the Belt and Road Initiative. It spans over 140 countries. They have poured roughly $1 trillion into building roads, ports, and bridges worldwide. Why? To make sure these countries can trade directly with China without ever needing to use a single U.S. dollar.
- Their Own Version of Venmo: China built its own digital banking highway, CIPS, to move money across borders. In 2024, this system processed a mind-boggling $24.47 trillion worth of Chinese currency (the yuan). That is a massive 42.6 percent jump from the year before. On top of that, China has set up special currency swap lines with more than 40 central banks worldwide.
- Ditching the Dollar with Friends: This isn’t just a theory. It’s happening right now. China and Russia now do about 95 percent of their trade using their own local currencies. In Brazil, nearly half of all trade with China was done in yuan in 2024.
- Building a Rival Club: The BRICS, a club of powerful developing economies. China helped expand it to include major oil and economic players such as Saudi Arabia, Iran, the UAE, Egypt, and Ethiopia.
By bringing all these countries together, China is building the structural scaffolding for a completely parallel financial world. If the US system ever goes down, or if China decides to cut ties, they will already have a brand-new global economy ready to run.
These are not incidental developments. They form a sequenced architecture: first build the exits, then reduce dollar exposure, then create the conditions under which a concentrated move in Treasuries has maximal signalling power without catastrophic self-harm. As the People’s Bank of China pivoted its reserves toward gold, now at a record 2,308 tonnes after 15 consecutive months of accumulation, analysts noted that the strategy is explicitly designed to “sanction-proof” the Chinese economy, a direct response to the freezing of Russian assets in 2022.
The contagion risk lies not merely in the flows themselves but in the permission the move grants to others. Japan has been watching nervously; Gulf producers have been quietly diversifying; and the Global South, long wary of dollar-centric finance, is increasingly seeking institutional distance from Washington’s monetary dominance. The IMF’s own data show the dollar’s share of global foreign exchange reserves fell to 57.8 percent in Q4 2024, down from a peak of 72 percent in 2001, while central banks purchased more than 1,000 tonnes of gold in each of the last three years. The real question isn’t whether the US dollar will lose its crown overnight. It won’t. The real question is whether China’s moves will convince everyone else to jump ship at the same time. Right now, other countries are hesitant. But the second they see that it is safe to ditch the dollar, it becomes a self-fulfilling prophecy. Once the first few dominoes fall, the rest will follow.
READ: The rise of China in Middle East politics
Washington’s retaliatory options are narrower than the rhetoric suggests. Broad financial sanctions on China would cascade through U.S. consumer prices, corporate margins, and supply chains: Apple, Nike, and Tesla remain deeply embedded in Chinese manufacturing networks, and the US-China Commission has documented Beijing’s growing capacity to weaponise those dependencies in return. Compelling China to resume buying or halt selling would require either market incentives Washington cannot currently offer or coercive tools whose costs fall hardest on American consumers.
The massive market sell-off in the spring of 2026 might not be the single explosion that destroys the US dollar. But it is a massive warning sign. This is a trend that anyone paying attention could see coming for years. Moving forward, the real wild card isn’t what China does next. The real question is whether other major players—like Japan, Saudi Arabia, and developing countries across the Global South—look at this moment and decide it’s time to make their own move.
The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Monitor.
