China remained the largest foreign U.S. creditor in February amid a rebound in the country’s foreign-currency reserves as Japan’s purchases of Treasuries picked up.
China’s holdings rose for a second straight month, increasing by 1.1 percent to $1.18 trillion, U.S. Treasury Department data released yesterday show. Those of Japan, America’s second-largest lender, climbed 1.2 percent to $1.096 trillion after the Asian nation intervened in months prior to stem the yen’s appreciation. Net foreign purchases of Treasuries rose $41.2 billion, or 0.8 percent, to a record $5.1 trillion, the data show.
China’s currency reserves rose 3.9 percent in the first three months of 2012 from the previous quarter, reversing the first quarterly decline since 1998, according to the People’s Bank of China.
“If their reserves continue to grow we should see a channel into Treasuries,” said Shyam Rajan, an interest-rates strategist at Bank of America Merrill Lynch in New York, one of the 21 primary dealers that trade with the Federal Reserve. “Foreign demand should continue to be strong, given the indications we have had in the first quarter.”
China doubled the trading band of the yuan versus the dollar on April 14, a move that Stephen Roach, a professor at Yale University and former non-executive chairman for Morgan Stanley in Asia, said signals official confidence in the strength of the economy’s expansion.
The data showed China held $1.1662 trillion of Treasuries in January, an increase from the $1.1595 trillion reported for the period on March 15. The Treasury is now revising holdings data on a monthly basis rather than annually based on the nationality of the beneficial holder of the debt, while the initial data will still count the location of the purchase.
China increased its holdings of longer-term notes and bonds by $11.9 billion, or 1 percent, to $1.175 trillion. Its stake in short-term bills rose by $800 million to $3.8 billion, Treasury data show.
The rise in holdings comes after China reduced its position in U.S. government debt in 2011 for the first time since the Treasury started releasing the data in 2001, as yields fell to record lows. The world’s second-largest economy held $1.15 trillion Treasuries as of Dec. 31, down from $1.16 trillion in December 2010 and from a peak of $1.31 trillion in July 2011.
Japan Catches Up
Japan increased its holdings of U.S. government debt by 1.2 percent after adding 2.3 percent in January. The country in in October and November stepped into markets to rein in the yen’s gains to support an export-led economic recovery from last year’s earthquake.
Government yen sales totaled 14.3 trillion yen ($178 billion) last year, the third-biggest annual sum on record, after 20.43 trillion yen in 2003 and 14.83 trillion yen in 2004, data from Japan’s Finance Ministry show.
The yen tends to strengthen during economic and financial turmoil because the nation’s current-account surplus makes it less reliant on foreign capital. A stronger domestic currency hurts the overseas competitiveness of exporters and reduces the value of their repatriated income.
The yen reached a post-World War II record of 75.35 against the dollar on Oct. 31, and traded at 80.47 in Tokyo today.
“Japan has no choice but to add to Treasuries when they conduct yen-selling intervention,” said Kengo Suzuki, a foreign-exchange strategist in Tokyo at Mizuho Securities Co., a unit of Japan’s third-largest bank by market value. “Should the yen strengthen beyond 80, the authorities may start verbal intervention, and they may consider doing it for real one once it reaches the 76-level.”
Hong Kong’s Treasury holdings rose 4.6 percent to $140.5 billion, while the U.K., which is often seen as a proxy for Chinese demand, declined $11.1 billion, or 9.7 percent, to $103 billion.
The Fed remains the top holder of U.S. debt with $1.677 trillion on its balance sheet.