China May Be Shifting US Debt Holdings to Canada, Analysts Suggest

Wall Street analysts are suggesting that China might be covertly relocating its holdings of U.S. government debt to Canadian financial institutions. This maneuver could create the appearance of reduced financial engagement between Beijing and Washington, even as China continues to be a significant financier of U.S. deficits.

The theory is based on U.S. Treasury data indicating a substantial increase in Canada's reported holdings of American government debt and federally backed mortgage bonds. These holdings have reportedly surged to nearly $600 billion, more than quadrupling in the past five years. Concurrently, China's officially reported holdings of U.S. Treasuries have decreased by approximately half since 2016, now standing at $618 billion.

This divergence has led to speculation that China's apparent divestment from U.S. debt may represent a shift in the location of its investments rather than a significant sale. U.S. Treasury data identifies the country holding a bond but does not always reveal the ultimate owner.

Historically, China has been one of the largest foreign creditors to the United States, investing dollars earned from its substantial export sector into U.S. government bonds. If China transfers these investments to a Canadian bank, which then holds the securities on its behalf, the U.S. government records would attribute these holdings to Canada, not China.

This would result in China's reported U.S. investments appearing to shrink, despite no actual sale of assets. "The story here is that China has been much better at hiding its dollars than it’s been about getting out of the dollar," Brad Setser, a former U.S. Treasury official specializing in international capital flows, told Bloomberg.

A notable pattern involves mortgage-backed securities, which are investments tied to U.S. home loans and guaranteed by federal housing agencies. U.S. Treasury figures show that Canada's reported holdings of these securities have escalated to about $162 billion, a significant increase from approximately $21 billion in mid-2021. In contrast, China's reported holdings of similar mortgage bonds have dropped by nearly 50% since the start of 2024.

Vitaliy Liberman, a mortgage-debt specialist at DoubleLine, indicated to Bloomberg that his contacts on Wall Street identified China as a potential explanation for Canada's escalating holdings. Several mortgage investors and strategists also expressed unfamiliarity with any substantial buying of U.S. mortgage-backed securities by Canadian investors on this scale.

Such an arrangement could allow Beijing to reduce its perceived dependence on the U.S. dollar while retaining investments that might be difficult to replace. China's trade surplus exceeds $1 trillion, providing it with vast amounts of dollars for investment. Liquidating U.S. bonds could devalue its remaining holdings, while converting dollars to yuan could strengthen the Chinese currency and increase the cost of its exports.

However, direct evidence definitively linking China to Canada's increased bond purchases is currently absent. Some analysts suggest that Canadian hedge funds could account for at least a portion of this increase. "I’m not quite comfortable saying clearly this is all China," Alex Etra, a senior macro strategist at Vanda Research, commented to Bloomberg.

China's foreign-exchange regulator and Canada's banking regulator have declined to comment on the matter to Bloomberg. The Treasury Department, as well as the Chinese and Canadian governments, have been contacted for comment.