China’s U.S. Debt Buying Seen Limited, Former Adviser Says

China may limit its purchases of U.S. Treasuries because the central bank has reduced its buying of dollars at home, according to a Chinese academic who has served as a government adviser.

The People’s Bank of China has “noticeably” reduced its purchases of dollars from local banks to allow commercial banks to trade among themselves, Ding Zhijie, dean of finance at Beijing’s University of International Business and Economics, said in a Nov. 23 interview. That may cap the nation’s foreign-exchange reserves and consequently its demand for U.S. government debt, he said.

The scaled-back intervention is part of a shift toward managing the currency through the daily price fixing, Ding said. A reduction in China’s U.S. debt holdings may help defuse criticism by some American politicians that their country is becoming too dependent on the world’s second-largest economy.

“We are now witnessing a big change -- China’s official foreign-exchange reserves will be stable or even fall slightly in the coming years,” said Ding, who advised the government on creating the nation’s sovereign wealth fund. “That means China’s new purchases of Treasuries will be limited and as you can already see, purchases have already started ebbing in the last couple of months.”

Treasury Holdings

China cut its U.S. government debt holdings by $123 billion in September to $1.156 trillion, according to U.S. Treasury Department data released Nov. 16. China’s State Administration of Foreign Exchange, which manages the country’s $3.3 trillion foreign exchange reserves, doesn’t publish data on its holdings.

Other countries’ buying of Treasuries has more than made up for the drop from China. Japan, which raised its stake by 6.9 percent this year to $1.13 trillion, is on a pace to surpass China and top the list of foreign creditors by January.

Brazil, Belgium, Luxembourg, Russia, Switzerland, Taiwan and Hong Kong boosted their holdings of U.S. government securities by a collective $264.8 billion since the last debate over the U.S. debt ceiling ended in August 2011, U.S. data show.

The PBOC has barely intervened in the foreign-exchange market for four quarters, Yi Gang, a deputy governor and head of the State Administration of Foreign Exchange, said at an International Monetary Fund meeting in Tokyo last month.

Dollar Buying

Liu Dongliang, a senior currency analyst with China Merchants Bank in Shenzhen, said the PBOC’s willingness to buy dollars in the interbank market has weakened significantly in recent weeks. “This in turn means the central bank will have fewer dollars for its overseas allocation,” Liu said.

China’s foreign-currency holdings have tripled over the past six years, a result of a surging trade surplus, rising foreign investment and its policy of controlling the value of the yuan. That’s coincided with a surge in U.S. government debt holdings, which peaked at $1.31 trillion in July 2011.

China’s foreign exchange reserves climbed to a record $3.31 trillion in February 2012. Since then, holdings have fluctuated and were $3.29 trillion at the end of September, PBOC data show.

“When you have accumulated a third of the world’s total foreign-exchange reserves, you really don’t want to increase it anymore,” Ding said. “Boiled pork and chestnut is a very delicious dish, but you’ll be sick if you eat too much of it.”

The yuan today retreated from a 19-year high as the lowering of the central bank’s reference rate meant the currency had to weaken to remain within its permitted trading range. The currency fell 0.1 percent to 6.2273 as of 11:26 a.m. in Shanghai.

Trading Band

The central bank in April doubled the yuan’s daily trading band against the dollar to 1 percent on either side of its reference rate. The PBOC is trying to keep the rate “basically stable” through the daily price fixing, Ding said.

“The yuan rises against the dollar every trading day, but accumulated appreciation in a month will be less than 1 percent because of the price setting of the central bank,” he said.

Chinese ownership of Treasuries was an issue during this year’s U.S. election, which was won this month by President Barack Obama, a Democrat, over Republican Mitt Romney. “Does the America we want borrow a trillion dollars from China? No,” Romney said Aug. 30 in accepting the party’s nomination.

A super-political action committee, the Americans for Prosperity Foundation, joined with the advocacy group Citizens Against Government Waste to air television advertisements that showed China’s ownership of Treasuries as a threat to U.S. independence.

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