China Resumed Treasury Buys in July as Trade Surplus Widened

China, the biggest foreign owner of U.S. government debt, bought Treasury securities in July for the first time in three months as the nation’s trade surplus with the U.S. widened by the most on record.

The Asian country’s holdings increased by $2.6 billion, or 0.2 percent, to $1.15 trillion, U.S. Treasury Department data released yesterday show. The total amount held is down 0.2 percent from 2011, when China reduced its ownership on an annual basis for the first time since the data was made available in 2001.

China recorded a $29.4 billion trade surplus with the U.S. in July, pushing the year-to-date amount to $174.4 billion, Commerce Department data show. The trade deficit was a record $295.4 billion last year. China increased its holdings of Treasuries even as yields fell to record lows in July.

“The biggest misconception in the marketplace is that Chinese buying of Treasuries has something to do with Treasuries,” said Krishna Memani, director of fixed income at OppenheimerFunds Inc. in New York, who manages $70 billion. “China buying Treasuries has everything to do with China’s trade position relative to the U.S. It’s entirely trade driven.”

The Obama administration said that China’s policies keep its currency undervalued and produce an unfair advantage in global trade. In its semi-annual report to Congress on exchange- rate policies in May, the Treasury Department said that it will continue to push for changes that yield greater exchange-rate flexibility.

Currency Reserves

Treasuries fell for the first time in three days, with the yield on the benchmark 10-year note rising two basis points, or 0.02 percentage point, 1.83 percent as of 6:13 a.m. in London. The yuan rose 0.1 percent to close at 6.3120 per dollar.

The monthly changes in Chinese holdings of Treasuries mirror a slowdown in the pace of growth in currency reserves, which increased 1.9 percent to $3.24 trillion through the first six months of 2012, compared with full-year gains of at least 12 percent in each year since 2001, according to People’s Bank of China data.

“Part of the reason that China has been buying Treasuries over the past several years is because they’ve been active in their currency markets and need to put those dollars to work,” said Michael Pond, head of global inflation-linked research in New York at Barclays Plc, one of 21 primary dealers that trade with the Federal Reserve. “They haven’t necessarily been accumulating dollars to put to work.”

Japanese Holdings

The world’s most populous nation’s holdings of short-term Treasury bills slipped 48 percent to $4.3 billion, the fewest since April. At the same time its position in longer-term notes and bonds rose 0.6 percent to $1.1453 trillion, the most since April.

Japan, the second largest foreign lender to the U.S., increased its holdings $7 billion or 0.6 percent to $1.1171 trillion. China now holds $32.5 billion more in U.S. government securities than Japan, the smallest gap since September 2008 when China overtook Japan as the U.S.’s largest creditor.

The Fed is the largest holder of U.S. government securities with $1.65 trillion.

Foreign investors held $5.35 trillion of Treasuries in July, an increase of 0.7 percent for the month and 6.9 percent for the year, U.S. government data show.

Foreign investors held 50.4 percent of the $10.6 trillion of outstanding marketable U.S. debt as of July, little changed from the month before and from December 2011.

To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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