China Reduces U.S. Treasury Holdings as Debt Ceiling Debated

Former People's Bank Of China Adviser Yu Yongding
Former People's Bank Of China adviser Yu Yongding said last month that China should stop buying Treasuries because of the risk that the U.S. may eventually default. Photographer: Nelson Ching/Bloomberg

China, the biggest foreign owner of U.S. government debt, trimmed its holdings of Treasuries for a fifth straight month in March as lawmakers debate how to expand borrowing after reaching a statutory threshold. The Asian nation owns $1.145 trillion of the debt, down $9 billion, or less than 1 percent, from the previous month, according to Treasury data released yesterday. The holdings reached a record $1.175 trillion in October.

China’s concern that U.S. government securities may become more risky because of the nation’s deficits and debt burden prompted its call this month for President Barack Obama’s administration to lay “a solid fiscal foundation” for long-term growth. Former Chinese central bank adviser Yu Yongding said last month that China should stop buying Treasuries because of the risk that the U.S. may eventually default.

China may “gradually cut its U.S. Treasuries as it seeks to diversify its foreign-exchange holdings,” said Yao Wei, a Hong Kong-based economist with Societe Generale SA. She said “China is probably routing trades through other places such as London,” meaning U.S. data may not give a full picture.

Treasury data show holdings of U.S. government debt in the United Kingdom have increased $53.6 billion, or 20 percent so far this year, to $325.2 billion.

In the U.S., Republicans and Democrats have been arguing over when and how to raise a $14.3 trillion debt limit. Obama has said that a failure to act may disrupt the global financial system and plunge the nation into another recession.

Conflicted History

China has offered critiques of U.S. fiscal and monetary policy while continuing to buy the debt. When the Fed announced in March 2009 it would buy $300 billion of Treasuries, the decision was called “irresponsible” by Li Xiangyang, of the government-backed Chinese Academy of Social Sciences, because it could weaken the dollar.

“We have lent a massive amount of capital to the United States, and of course we are concerned about the security of our assets,” Chinese Premier Wen Jiabao said in March 2009 after Obama signed his $787 billion stimulus package into law. “To speak truthfully, I do indeed have some worries.”

After the Fed announced its plan to purchase $600 billion of Treasuries through June to stoke inflation expectations and boost employment, China’s vice foreign minister, Cui Tiankai, said Nov. 5 “many countries are worried about the impact of the policy.”

China increased its Treasury position 23 percent to $894.8 billion in 2009 and 30 percent to $1.16 trillion in 2010, revised Treasury data show.

U.K. Impact

Year-end revisions to Treasury data on foreign holders of its debt led to a $268.5 billion increase in China’s position in the debt to $1.16 trillion and a $271 billion reduction in the holdings in the U.K. to $272.1 billion.

The discrepancy comes in part from the different methodology used in the monthly statistics and the annual revisions. The monthly figures collect holdings data based on the location of the counterparty at the time of purchase while the revised totals reflect the identity of the owner.

“A lot of central banks have operations in London,” said Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York, one of 20 primary dealers that trade directly with the Fed. “A lot of transactions are based in London even though the beneficial owner might be a Middle Eastern central bank or an Asian central bank. That happens quite frequently.”

Debt Ceiling

U.S. Treasury Secretary Timothy F. Geithner said yesterday that he has used accounting measures to extend the deadline until Aug. 2.

“China has kept on lending money to the U.S. to keep its export machine going, and to prevent losses” on its holdings of Treasuries, Yu said last month. “Perhaps it is too late to do anything about the existing stock without causing a serious political and financial backlash. But at least China should stop continuing building up its holdings.”

Officials including central bank adviser Li Daokui have urged diversification of the nation’s foreign exchange reserves away from U.S. debt.

Japan, the second-largest holder of Treasuries, increased its holdings by $17.6 billion to $907.9 billion in March from $890.3 billion in February. Hong Kong, counted separately from China, reduced its holdings by $2.5 billion to $122.1 billion from $124.6 billion.

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