To The Moon

Deciding the "best" asset for China after selling U.S. Treasuries depends on its economic goals, risk tolerance, and geopolitical strategy. China’s central bank, the People’s Bank of China (PBOC), prioritizes stability, liquidity, and diversification while managing its massive foreign exchange reserves (around $3.3 trillion in early 2025). Here’s a breakdown of potential assets China might consider, along with their pros, cons, and why they align (or don’t) with China’s needs:

1. Gold

Why China Might Choose It:

Hedge Against Dollar Decline: Gold is a non-dollar asset that holds value during currency volatility or inflation, aligning with China’s de-dollarization push.

Geopolitical Safety: Unlike bonds or stocks, gold isn’t tied to any nation’s debt or policies, reducing exposure to sanctions or U.S. financial leverage.

Track Record: China has been a top gold buyer for years, adding over 1,000 tons to its reserves since 2015. In 2024, it bought around 400 tons, signaling strong interest.

Domestic Support: Gold bolsters confidence in the yuan, especially if China aims to internationalize its currency.

Pros:

Retains value during crises.

Diversifies reserves away from fiat currencies.

Signals financial independence.

Cons:

No yield—unlike bonds, gold doesn’t generate income.

Price volatility can lead to short-term losses (e.g., gold hit $2,700/oz in late 2024 but can swing 10-20% annually).

Storage and security costs.

Limited liquidity compared to Treasuries—hard to sell large amounts quickly without crashing prices.

Fit for China: Gold is a strong candidate for a portion of reserves (say, 5-10%), but not a wholesale replacement for Treasuries. It’s a long-term hedge, not a liquid workhorse.

2. Other Sovereign Bonds (e.g., Eurozone, Japan, or UK Gilts)

Why China Might Choose It:

Diversification: Bonds from Germany, France, or Japan offer exposure to other stable currencies (euro, yen) while maintaining safety.

Yield Potential: Some Eurozone bonds, like French or Italian debt, offer slightly higher yields than Treasuries (e.g., German 10-year bunds yielded ~2.5% in early 2025).

Trade Ties: Investing in European or Japanese debt strengthens economic partnerships, especially as China seeks EU market access amid U.S. tariffs.

Pros:

High liquidity, similar to Treasuries.

Low default risk for top issuers (Germany, Japan).

Currency diversification reduces dollar reliance.

Cons:

Lower yields than U.S. Treasuries in many cases (e.g., Japan’s 10-year bonds yield ~1%).

Eurozone political risks (e.g., French budget woes in 2024 spiked yields).

Smaller market depth compared to U.S. Treasuries—China’s large purchases could distort prices.

Currency risk if the euro or yen weakens against the yuan.

Fit for China: A solid option for reallocating 20-30% of sold Treasuries, especially German or Japanese bonds. But these markets can’t absorb China’s scale like the U.S. can, and yields are often less attractive.

3. U.S. Agency Bonds (e.g., Fannie Mae, Freddie Mac)

Why China Might Choose It:

Close Substitute: Agency bonds are U.S. government-backed, nearly as safe as Treasuries, but offer slightly higher yields (e.g., 4.5-5% vs. 4% for 10-year Treasuries in 2025).

Liquidity: Deep market, easy to buy/sell.

Continuity: China already holds over $200 billion in agency debt, so shifting from Treasuries to agencies is a low-friction move.

Pros:

Near-Treasury safety with better returns.

Maintains dollar exposure, useful for trade surpluses.

Less politically charged than Treasuries.

Cons:

Still tied to U.S. economy and dollar risks.

Slightly higher credit risk than Treasuries (though minimal).

Doesn’t advance de-dollarization goals.

Fit for China: A practical short-term choice for 10-20% of proceeds, especially if China wants to stay in dollar assets without signaling a major shift. It’s more of a lateral move than a bold diversification.

4. Yuan-Denominated Assets (Domestic Bonds or Infrastructure)

Why China Might Choose It:

Yuan Support: Converting Treasury proceeds into yuan and investing domestically (e.g., Chinese government bonds or state-owned enterprises) strengthens the currency and local markets.

Economic Stimulus: Funds could finance infrastructure or green energy, aligning with China’s 2025 growth targets (~5% GDP).

Policy Control: Domestic assets are fully under PBOC influence, unlike foreign bonds.

Pros:

Boosts yuan internationalization.

Fuels domestic growth amid export slowdowns (e.g., 2024’s weak global demand).

No foreign currency risk.

Cons:

Lower yields (Chinese 10-year bonds yield ~2.2% vs. 4% for Treasuries).

Capital controls limit global usability of yuan assets.

Overinvestment risks (e.g., property sector bubbles).

Less liquid than global bonds—hard to offload in a crisis.

Fit for China: Ideal for long-term strategy, especially to absorb dollars from trade surpluses. Could take 20-30% of proceeds, but China must balance this with global reserve needs.

5. Emerging Market Bonds or Assets (e.g., BRICS Nations)

Why China Might Choose It:

Geopolitical Alignment: Investing in Brazil, India, or Russia strengthens BRICS ties and counters U.S. influence.

Higher Yields: Emerging market bonds often yield 6-10%, attractive for returns.

Trade Support: Bolsters partners who buy Chinese goods.

Pros:

Diversifies away from Western assets.

Enhances China’s soft power in Global South.

Potential for high returns if markets stabilize.

Cons:

Higher default risk (e.g., Argentina’s 2024 bond woes).

Currency volatility in smaller economies.

Illiquidity—can’t absorb China’s scale.

Political instability in some issuers.

Fit for China: A niche play, maybe 5-10% of proceeds. Too risky for core reserves but useful for diplomatic signaling.

6. Equities or Private Investments (e.g., Tech, Green Energy)

Why China Might Choose It:

Growth Potential: Stocks or private equity in tech (AI, EVs) or renewables could outpace bond returns.

Strategic Influence: Investments in global firms (e.g., European automakers) secure supply chains or market access.

Innovation Push: Aligns with China’s goal to lead in AI, semiconductors, etc.

Pros:

High upside if markets rally (e.g., MSCI World Index up 15% in 2024).

Diversifies beyond fixed income.

Supports industrial policy.

Cons:

High volatility—global equities can crash (e.g., 2022’s 20% drop).

Illiquidity in private investments.

Political backlash (e.g., U.S. scrutiny of Chinese stakes in tech).

Not suitable for core reserves needing stability.

Fit for China: A long-shot for reserves—maybe 1-5% for sovereign wealth funds like CIC, not the PBOC. Too volatile for China’s risk-averse reserve management.

7. Cryptocurrencies or Digital Assets

Why China Might Choose It:

Innovation Hedge: A small bet on digital assets could position China for a blockchain-driven future.

Yuan Digitalization: Complements China’s digital yuan (e-CNY) rollout.

Pros:

Potential for outsized gains (Bitcoin hit $90,000 in 2024).

Bypasses traditional finance choke points.

Cons:

Extreme volatility (crypto crashed 30% in weeks during 2022).

Regulatory bans—China cracked down on crypto trading in 2021.

No central bank would bet reserves on speculative assets.

Security risks (hacks, fraud).

Fit for China: Near-zero chance for reserves. China might research blockchain but won’t touch crypto for official holdings.

What’s the “Best” Asset?

No single asset ticks all boxes—China’s likely to spread proceeds across several:

Gold (10-15%): For de-dollarization and crisis-proofing.

Euro/Japanese Bonds (20-30%): For safety and currency diversification.

U.S. Agency Bonds (15-20%): For yield and liquidity without abandoning dollars.

Yuan Assets (20-30%): To bolster domestic growth and the yuan’s global role.

Emerging Markets/Equities (5-10%): For strategic bets and higher returns.

Top Pick: If forced to choose, gold stands out. It aligns with China’s long-term goal of reducing dollar dependence, hedges against global uncertainty, and carries symbolic weight as a non-Western asset. But China won’t go all-in—its reserve management is too cautious for that. Expect a balanced mix, with gold and yuan assets gaining ground over time.