The U.S. debt-ceiling debacle may have led China's Dagong Global Credit Rating to downgrade its U.S. sovereign debt rating, but analysts say it's unlikely to impact China's decision to hold Treasurys.
"I don't see there being a massive change to [China's] asset allocation towards Treasurys. Look at the level of FX reserves they have, there's no other market that provides the liquidity that they need," said Chris Weston, chief market strategist at IG. "There will be some diversification, but there's no other market that can house the size of capital that they have."
China is the biggest foreign holder of U.S. government debt. At the end of July, China held $1.28 trillion in Treasurys, accounting for roughly 22.8 percent of all foreign holdings of U.S. government debt.
Dagong, one of China's top four ratings agencies, cut its rating on U.S. sovereign debt to "A-" from "A" on Thursday, maintaining a negative outlook. Dagong has a similar ratings scale to S&P and Fitch, with "AAA" marking the highest rating. It argued that the deal reached by Congress to end the partial government shutdown and raise the debt ceiling will only avert a crisis temporarily.