There are growing suspicions that China could be quietly accumulating large amounts of US government debt through Canadian banks. This strategy may allow Beijing to appear as though it’s reducing its financial connections to the US, all while indirectly facilitating Washington’s substantial deficits, according to analysts from Wall Street.
Evidence for this theory comes from US Treasury data, which shows that holdings of American government debt and federally backed mortgage securities by Canada have ballooned to nearly $600 billion—an increase of more than four times compared to five years ago, as reported.
In contrast, China’s own reported holdings of US Treasuries have dropped by about half since 2016, now totaling $618 billion.
This discrepancy has raised eyebrows, suggesting that China’s apparent withdrawal from US debt may actually be more about where those investments are recorded, rather than indicating a significant selloff.
It’s worth noting that US Treasury figures indicate which country holds a bond but do not necessarily disclose the actual owner.
Historically, China has been one of America’s largest foreign creditors, investing profits from its massive export trade into US government bonds.
If China were to move its investments to a Canadian bank that manages these securities on its behalf, those holdings would then be recorded as Canadian in US government data instead of Chinese.
This means, theoretically, China’s investments in the US could appear to be dwindling, even if Beijing hasn’t actually sold anything.
“The story here is that China has been much better at hiding its dollars than it’s been about getting out of the dollar,” said Brad Setser, a former US Treasury official focused on international capital flows.
One particularly notable trend involves mortgage-backed securities, which are linked to US home loans and are backed by federal agencies.
According to US Treasury data, Canada’s reported holdings of these securities have surged to approximately $162 billion, a stark rise from around $21 billion just two years ago.
In contrast, China’s reported holdings of similar mortgage bonds have dropped nearly 50% since the start of 2024.
Vitaliy Liberman, a mortgage-debt specialist, mentioned that sources he consulted pointed to China as a likely reason for the dramatic increase in Canada’s securities holdings.
Several mortgage investors and strategists have also expressed that they weren’t aware of Canadian entities buying US mortgage-backed securities in such high volumes.
This suspected arrangement could allow Beijing to seem less reliant on the US dollar while still retaining investments that are hard to replace.
Despite the intertwining financial relationship between Washington and Beijing, with China reportedly holding $618 billion in US Treasury securities, there’s no direct evidence confirming China’s involvement in this Canadian buying spree. Some analysts suggest that Canadian hedge funds might account for at least part of this uptick.
“I’m not quite comfortable saying clearly this is all China,” remarked Alex Etra, a macro strategist.
China’s foreign-exchange regulator declined to comment, while Canada’s banking regulator stated it does not disclose client activity. Attempts to get comments from the Treasury Department and both Chinese and Canadian governments are ongoing.
