China Cuts Back on U.S. Treasury Bond Holding

Wednesday, 17 Feb 2010 08:29 AM

WASHINGTON – China has slashed its holding of U.S. Treasury bonds after expressing concern over the swelling U.S. deficit and amid rising US-China tensions, according to government data released.

The drop in China's bond holdings by 34.2 billion dollars or 4.3 percent to 755.4 billion dollars in December also fueled the biggest drop in foreign purchase of short-term US bonds, said the Treasury's latest international capital data report and based on comparative figures.

China's US bond holding decline was also its biggest drop since August 2000 and allowed Japan to regain its position as top holder of American government debt after a 15-month hiatus.

Japan's holding increased to 768.8 billion dollars in December from 757.3 billion dollars the previous month, Treasury data showed.

China had grabbed the top position from Japan in September 2008 and gradually increased its US bond holdings until December last year.

The decline in the Chinese holding came amid deteriorating US-China relations in recent months with problems seen on multiple fronts, and after Beijing expressed concern about US economic woes.

Some analysts said China might be cutting purchases of US Treasuries to flex its financial leverage on US President Barack Obama's administration. Related article: China seen flexing financial muscle

"The last few months of net sales of US Treasuries by China might also contain a subtle economic and political message to the US," Eswar Prasad, a trade policy professor at Cornell University and former head of the International Monetary Fund's China division, told AFP.

"Chinese leaders are deploying their reserves to try and pressure the US to stop haranguing China about its currency and trade policies and to back off from interference in its domestic political and human rights issues," he said.

But Nicholas Lardy, a China expert at the Washington-based Peterson Institute for International Economics, told AFP the December drop in China's Treasury bond holdings was "very small" and one should not read too much into it.

Beijing also held more than 400 billion dollars in US agency debt such as those of mortgage giants Fannie Mae and Freddie Mac, effectively making its bond holdings much larger, he pointed out.

In addition, Lardy said, the Treasury data might not include securities held in "street names."

China has consistently raised concerns about the mushrooming US debt, fearing it could erode the value of the dollar and its Treasury holding.

US Treasury Secretary Timothy Geithner traveled to Beijing in June last year to reassure Chinese leaders, saying their money is "very safe" despite the US budget deficit, which he pledged to cut.

In the latest US-China dispute, President Barack Obama's administration rebuffed Beijing's demand to cancel his meeting this week with the Dalai Lama.

The deepening public spat over Tibet, a row over US arms sales to Taiwan, China's dispute with Google and trade and currency disagreements, come at a key diplomatic moment, as Obama seeks Chinese help to toughen sanctions on Iran.

"While China may reduce its holdings of US debt in order to send a signal to Washington -- though this is not necessarily the only reason it would do so -- it has no intention of selling debt to the point that it wrecks the US economic recovery, since doing so would destroy China?s own economic and socio-political stability," analysts at US think tank Stratfor said in a note to clients.

China is highly dependent on US export markets and invests the bulk of its 2.2 trillion dollars in foreign exchange reserves in US Treasury bonds.

The United States receives a large volume of low-cost imports from China while Beijing's Treasury bond holding virtually finances the snowballing US budget and current account deficits.
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Copyright 2010 AFP