US dollar Photo: Xinhua

The Chinese mainland's holdings of US Treasury debt fell for a third consecutive month in May to $846.7 billion, nearly a 13-year low, according to data released by the US Department of the Treasury on Tuesday (US time).

The figure was down by $22.2 billion from the previous month and down by $105.1 billion from the same month in 2022. 

The mainland's holdings of US Treasury debt peaked at $1.3167 trillion in November 2013 and have since generally remained on a downward trajectory, which economists forecast will persist amid a wide de-dollarization wave across the world.

All four of the largest holders of US debt saw their holdings decrease in May. Japan, though still the largest holder, saw its holdings drop $123.1 billion year-on-year to $1.0968 trillion in May. In order to boost the weak yen, Japan reduced its holdings for the most of 2022. 

Both active selling and the "negative valuation effect," which refers to a situation where the market price of US Treasury debt is below the book value, have reduced the value of China's holdings, Ming Ming, chief macroeconomist at CITIC Securities, told the Global Times on Wednesday.

A negative valuation effect usually occurs when the market expects the US Federal Reserve to raise interest rates, which will lead to a rise of bond yields and a decline of bond prices. "This leads to a passive decline of the holdings position," Ming said.

The Fed's aggressive interest rate hikes have led to a decline in US Treasury prices. In order to reduce the resulting losses, China cut its holdings, according to Ming.

In the meantime, the Ukraine crisis has raised concerns around the world about the safety of assets such as US Treasury debt, economists said.

"Though the US dollar remains the dominant payment currency around the world, countries and regions have gradually started to reduce their dependence on it due to the deteriorating US economic situation, especially after Washington wielded its dollar hegemony to sanction Russia," Xi Junyang, a professor at the Shanghai University of Finance and Economics, told the Global Times on Wednesday.

Investors tend to purchase US Treasury debt with excess dollars to earn interest. However, demand for the dollar is dropping, and so is that for US Treasury debt, Xi told the Global Times, and this will not be a short-term scenario.

More countries are planning or establishing local currency payment mechanisms, with the latest being Indonesia and India, which plan to settle bilateral transactions in local currencies, Bloomberg reported on Sunday.

ASEAN member states have kicked off discussion on how to reduce dependence on the US dollar, euro, yen and pound from financial transactions and move to settlements in local currencies. Some Indian refiners have used the yuan to buy Russian oil as well, reports said.

These are only the latest global efforts to reduce dependence on the dollar, and "the gradually declining trend of the dollar as an international currency over the long run is irreversible," Xi said.

What's more, the US keeps lifting its debt ceiling and issuing new bonds to make up for the fiscal gap. That's not sustainable, and in the long run, it will make other countries worry about the performance of US Treasury debt, Xi noted.