Let’s break it down. A “foreign exchange reserve” is what a country’s central bank holds to stabilize its currency and back up trade. It’s usually a mix of currencies (like dollars or euros), debt (like U.S. Treasuries), and commodities (like gold). And China has ~$3.2 trillion of it.
For decades, U.S. Treasuries were the safest reserve asset. They’re liquid, dollar-denominated, and backed by the full faith of the U.S. government but they also come with two major risks: • Dollar depreciation • Weaponization of the financial system
China learned the second lesson the hard way by watching Russia. When the U.S. sanctioned Russia over Ukraine, $300B of Russia’s reserves were frozen. Inaccessible. Seized. Just like that.
That terrified central banks. Because it meant your sovereign wealth wasn’t really sovereign if it was held in U.S. assets. China, always wary of U.S. containment, saw this as a wake-up call.
The People’s Bank of China (PBoC) started buying gold like never before. For 18 straight months, they added to their reserves reaching 2,292 tonnes by 2025 . That’s over $200 billion worth at today’s prices.
Why gold? Because unlike dollars or bonds, gold can't be frozen or sanctioned. It’s apolitical, portable, and historically stable. No counterparty. No SWIFT. No Washington.
But here’s the thing: this isn’t a panic. It’s a controlled, long-term exit from the dollar system. China doesn’t want to crash the Treasury market (they’d hurt themselves too) so they’re gradually letting bonds mature and not reinvesting.
Some experts call it "stealth diversification." A slow but steady shift where China holds less U.S. debt and more neutral assets like gold, euros, and IMF SDRs. Even the yuan is entering the mix, as China pushes for its own currency to go global.
Back to Treasuries. In 2013, China held over $1.3 trillion in U.S. debt. By 2025, it's down to $757 billion and for the first time ever, China is no longer the #1 foreign holder. Japan and the U.K. have taken the lead.
This change has HUGE implications for the U.S. Foreign central banks buying Treasuries keeps America’s borrowing costs low. If they stop or worse, sell interest rates could spike and the dollar could lose its special status.
The term for that status? “Exorbitant privilege.” It means the U.S. can borrow in its own currency, export inflation, and run deficit because everyone wants dollars. That privilege depends on trust and trust is slowly eroding.