China cuts US debt holdings in August

Updated: 2011-10-19 10:43

By Zhang Yuwei (China Daily)

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NEW YORK - China, the largest foreign owner of United States Treasuries, cut its holdings by $36.5 billion - to $1.14 trillion - in August.

Overall, overseas buyers increased their purchases in the same month after two months of declines, according to data released by the US Treasury Department on Tuesday.

China's 3.1 percent cut is also the first decrease in its holdings since a 0.8 percent decline in February. It was the biggest dollar sell-off by China this year, following net buying of more than $8 billion in July.

August was also the month when a lengthy debate in Congress on raising the US debt ceiling reached its deadline. The US hit its $14.3 trillion borrowing limit in May and set a deadline in August to raise the debt ceiling to avert a default.

Right before the Aug 2 deadline, Washington reached a last-minute deal to raise the debt limit by more than $2 trillion, although the US' top-notch AAA credit rating was still knocked down a peg by ratings agency Standard and Poor's a few days later.

The Treasury Department data, known as the TIC (Treasury International Capital System), said the total holdings rose 2 percent to $4.57 trillion, following the first decreases since April 2009.

Experts, however, say even though China may be diversifying its holdings in foreign debt, the US is still a promising and safe option for foreign investors, including China, because of its "large and liquid" market.

"China has for some time now been seeking to diversify its holdings of foreign debt. China clearly feels it's over-invested in the US dollar and US-dollar assets," said Kenneth Lieberthal, a senior fellow in Foreign Policy and Global Economy and Development at the Brookings Institution in Washington.

"But the diversification has been really unbalanced around the margins. The reasons why China has been purchasing so much US dollar denominated debt are the same reasons that others purchase a large amount of US debt - we have a very large, very liquid and very safe debt market. The US is not going to default on its debt, and the market is uniquely large and liquid," he added.

Lieberthal said China, in terms of purchasing foreign debt, doesn't have many options "given the volume of China's purchases".

"It doesn't have the options effectively totally avoiding the US market, and it certainly doesn't have the option of dramatically reducing its US debt holdings," he explained.

Last month, China was in talks with Italy for possible offer to buy Italian debt amid the Europe fiscal crisis. Just last week, China bought more Japanese debt holdings than it sold for the first time since last October. But experts still think the US debt is a safe option for foreign investors.

"Europe is having its own difficulties at the moment. While the US (debt) is not perfect, there is a preference to hold US sovereign debt right now over European sovereign debt. Japan is not insulated, either," said Scott Sherman, an interest rate strategist at Credit Suisse Group AG in New York.

Some financial analysts even have doubts over the preciseness in the TIC data and don't believe the data reflects the reality in the transactions.

Sherman calls the TIC data "very unreliable" and he wouldn't read much into it.

"The data is taken from whoever the immediate counter party is to a transaction with a US institution. Very often what happens is China's purchases get attributed to others countries, like the United Kingdom, and the UK was acting very sharply in August," Sherman said.

He added that it doesn't necessarily mean that China was buying through the UK, but it shows the inaccuracy the data may contain.

"So the decline you see in China (in the TIC data) doesn't mean China is getting rid of (US) treasuries. It doesn't mean China sold treasuries," Sherman said.

Aneta Markowska, a senior US economist for the French bank Societe Generale in New York, echoed Sherman's point.

"There is a major flaw in the report in that it records investment flows based on the direct counter parties to the trade, not the ultimate beneficiary. For example, OPEC countries have long been known to buy US assets via the London banking centers and these purchases show up in the TIC data as UK purchases," she said.

"There are reasons to believe that China is increasingly channeling funds via London as well," Markowska said.

China Daily