China: More Euro, Less BRICS and Rupees

Published on January 28, 2021

China’s holdings of foreign government bonds in its FX reserves increased by $43.191 billion through 2020, with about 65% of that rise, unadjusted for currency fluctuations, coming from European government bonds.

Broken down geographically, that headline figure included a net increase last year of $2.588 billion in US Treasuries, $28.176 billion in European government bonds, $3.116 billion in Japanese government bonds, and $9.426 billion in government bonds of the BRICS and other major emerging market economies.

Interestingly, according to US Treasury data, China reduced its holdings of US treasury securities by $6.9 billion over the first 11 months of 2020, while PBoC figures show the total holdings of US treasuries bonds by financial institutions across all of China to have shrunk by $26.35 for all of 2020, with the vast bulk of the drop occurring in Q3, and more particularly September, of 2020.

Looking ahead, sources note that even while the European economy remains substantially more fragile than that of the US, increasing China’s holdings of European government bonds, especially those of countries friendly to China such as Germany and Switzerland, remains an “inevitable choice” in meeting China’s strategic goals of strengthening its ties with Europe, promoting the internationalization of the Renminbi, and weakening “the hegemony of the US dollar.”

Furthermore, China has adjusted its bond investment strategy to reduce its purchases of BRICS bonds, most politically notable being those of India, to increase its purchases of the bonds of neighboring countries.

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