China and other sovereigns reducing US Treasury exposure while boosting gold, euros, RMB and building alternative payment channels

The global monetary order continues its decisive shift away from U.S. Treasuries and dollar dominance, as sovereign central banks accelerate diversification toward euros, gold, and the renminbi (RMB), while simultaneously constructing alternative payment and clearing infrastructures. This ongoing transformation is driven by intensifying U.S. fiscal pressures, mounting Treasury market liquidity challenges, and geopolitical dynamics that incentivize reduced reliance on the dollar system. Recent fiscal analyses and policy developments underscore and deepen these trends, highlighting profound implications for global financial stability and reserve management.

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Accelerating Reserve Diversification: Sovereigns Reduce Dollar Exposure Amid Rising Risks

Central banks worldwide are intensifying efforts to recalibrate their reserve portfolios to manage escalating risks tied to U.S. fiscal imbalances and Treasury market fragilities:

• China’s deliberate trimming of U.S. Treasury holdings has pushed its portfolio below $1.7 trillion as of early 2027, reflecting a cautious but persistent reduction in dollar exposure. Concurrently, China has boosted its gold reserves by 2%, grown euro-denominated assets by 10%, and expanded bilateral RMB swap lines. Integration of the digital yuan (e-CNY) into cross-border payment networks continues apace, positioning the RMB as a credible international alternative.

• The European Central Bank (ECB) has broadened liquidity swap lines to nearly all major emerging market central banks, with utilization surging over 35% in early 2027. This expansion bolsters the euro’s appeal as a reliable reserve currency amid dollar market fragmentation and growing geopolitical sanctions risks.

• Emerging market central banks in Asia, the Middle East, and Eastern Europe have collectively purchased more than 300 tons of gold in Q1 2027 alone, per the World Gold Council. Countries like India, Türkiye, and Uzbekistan are leading this accumulation, with Uzbekistan’s reserves now comprising over 90% gold, and Türkiye holding approximately $240 billion in gold assets.

• The Reserve Bank of India notably cut its U.S. Treasury holdings by 15% in 2027, reallocating reserves toward gold, euros, and participation in multilateral payment networks such as the BRICS payment system, underscoring a strategic pivot away from dollar dependency.

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U.S. Fiscal Strain and Treasury Market Challenges Deepen

Recent fiscal analyses have sharpened concerns over the sustainability of U.S. public finances, intensifying pressures on the Treasury market that underpin global reserve assets:

• Federal debt has surged past $39.5 trillion, with annual interest payments now exceeding $1 trillion and forecasted to approach $2 trillion by the 2030s. These mounting interest burdens exacerbate refinancing risks and place severe strain on Treasury market liquidity.

• Treasury issuance is expected to exceed $2.5 trillion in 2027, with a staggering $10 trillion maturity wall looming in 2028, creating significant supply-demand imbalances that challenge investor appetite.

• The 10-year Treasury yield surpassed 4.5% in early 2027, reflecting growing investor anxiety about fiscal sustainability. Auction demand remains weak, with bid-to-cover ratios hovering near historic lows (~2.0x), signaling diminished confidence from both foreign and domestic investors.

• Regulatory reforms, notably SEC mandates requiring central clearing of Treasury cash and repo trades, have intensified capital costs for dealers and curtailed market-making capacity, further constraining liquidity.

• The Federal Reserve’s large Treasury holdings (~$6.8 trillion) reduce the tradable float, exacerbating liquidity stresses in the secondary market.

• The Andersen Institute documents a “quiet repricing” of Treasury risk, with 10-year/10-year forward yields rising over 60 basis points since early 2026 to above 5.7%, underscoring a growing risk premium.

• Highlighting the paradox, former Reserve Bank of India Governor Raghuram Rajan notes: “Liquidity abounds in the system, yet Treasury market liquidity remains elusive.” This encapsulates the disconnect between abundant global liquidity and deteriorating Treasury market functioning.

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New Fiscal Insights Reinforce Reserve Diversification Drivers

Two recent studies add critical context to the fiscal drivers of reserve shifts:

• An analysis titled “Investors should know: impact of federal deficit on long-term interest rates” underscores how rising federal deficits systematically elevate long-term Treasury yields by increasing supply and investor risk aversion. This dynamic reduces the traditional “convenience yield” of U.S. Treasuries, accelerating the search for alternative safe assets.

• A think tank projection, “Trump’s loss of $1.7 trillion in tariff revenue will send the national debt to $58 trillion by 2036,” highlights how structural fiscal shocks—here, the Supreme Court’s invalidation of major tariff revenues—exacerbate the debt trajectory. This further complicates debt servicing and market confidence, reinforcing incentives for sovereigns to diversify reserves away from U.S. debt.

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Constructing Sovereign-Controlled Payment and Liquidity Networks

In parallel to reserve diversification, sovereigns are investing heavily in building alternative infrastructures to reduce dependency on dollar-centric payment systems:

• The People’s Bank of China (PBOC) is at the forefront, expanding RMB liquidity corridors and integrating the e-CNY into cross-border digital payment frameworks that bypass SWIFT and traditional dollar clearing systems. Bilateral RMB swap lines are expanding rapidly, enhancing RMB’s global usability.

• The BRICS coalition and allied emerging markets are developing joint payment and repo facilities denominated in euros and RMB, designed to support sovereign-controlled liquidity and reduce dollar exposure.

• The ECB’s expanded euro liquidity swap network strengthens euro funding access for emerging economies in Southeast Asia, Latin America, and beyond, facilitating euro usage in international trade and reserves.

• The Bank of Canada’s plans to central clear its repo markets aim to enhance transparency and reduce counterparty risk, although this has contributed to collateral scarcity pressures, illustrating the complex trade-offs in market reforms.

• Sovereign digital currencies (CBDCs) and blockchain-based interoperable payment rails are increasingly prioritized to enable faster, more cost-efficient, and sovereign-controlled cross-border payments. However, these innovations pose regulatory and systemic challenges that require careful multilateral coordination.

• The Deutsche Bundesbank stresses the urgent need for interoperable sovereign payment infrastructures to manage geoeconomic fragmentation and safeguard financial stability.

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Policy Responses and Multilateral Coordination: Navigating Transition Risks

Amid these systemic shifts, coordinated policy action remains vital to mitigate transition risks and preserve global financial stability:

• The U.S. Treasury and regulators are advancing reforms to alleviate Treasury market liquidity constraints, including expanding standing repo facilities, recalibrating bank leverage and liquidity requirements, and optimizing margin rules on Treasury transactions to encourage market participation.

• International bodies such as the IMF and OECD emphasize the importance of sound fiscal management, strong institutional frameworks, and multilateral cooperation to manage refinancing risks and support a resilient, multipolar reserve regime.

• The IMF advocates for U.S. fiscal consolidation to stabilize debt trajectories, alongside the development of expanded multilateral liquidity corridors and harmonized regulatory frameworks that can accommodate a diversified global reserve system.

• Policymakers underscore the need to balance fintech innovation, including stablecoins, CBDCs, and AI-driven financial technologies, with systemic risk controls to avoid exacerbating fragmentation or undermining monetary sovereignty.

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Gold’s Enduring Strategic Importance

Despite price volatility, gold remains a cornerstone of sovereign reserve strategies amid geopolitical and fiscal uncertainties:

• Central banks, particularly in China and emerging markets, continue selective gold accumulation. Gold prices stabilized above $3,700 per ounce by mid-2028, supporting sustained demand from sovereign buyers as a trusted hedge and portfolio diversifier.

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Conclusion: Toward a Multipolar and Digitally Empowered Global Financial System

The global financial architecture is undergoing a fundamental, technology-enabled reconfiguration:

• Geopolitical fragmentation, sanctions risks, and growing U.S. fiscal strain are driving a sustained reduction in reliance on U.S. Treasuries and the dollar.

• Sovereign actors are diversifying reserves toward euros, gold, and RMB, while building alternative digital payment and liquidity infrastructures that empower financial sovereignty.

• Structural fiscal challenges and regulatory reforms continue to pressure Treasury markets, accelerating the erosion of the traditional dollar-centric reserve system.

• Multilateral cooperation, fiscal prudence, and market infrastructure innovation are critical to managing the complex transition toward a diversified, multipolar reserve system that supports global growth and stability.

Navigating this evolving landscape requires agile policy innovation, strengthened sovereign payment networks, and international dialogue to ensure a resilient, balanced, and sovereignty-centered global monetary order in the decades ahead.