Tuesday, January 26, 2010

China retreats from US securities?

The inevitable Chinese retreat from US securities appears to be on the way. Even as the US Treasury indulged in its biggest borrowing binge ever last year, China has been cutting back on its exposure. The latest statistics released by the US Treasury claims that in the first eleven months of 2009 China raised its holdings (both private and government, but in China's case it is mostly government) of Treasury securities by just $62 billion, less than 5% of the money raised by Treasury.

Though China continues to be the largest foreign holder of US Treasury securities at $790 bn (followed by Japan at $757 bn and Britain at a distant $278 bn), its holdings have been falling since last July, the first such six-month decline since 2001. This decline comes despite the fact that during 2009 the volume of outstanding Treasury securities owned by the public (as opposed to United States government agencies like the Federal Reserve or the Social Security Administration) rose 23% by $1.4 trillion to $7.8 trillion, the largest annual increase ever. This means that China lend just 4.6% of the money the government raised during the year, compared with 20.2% in 2008 and a peak of 47.4% in 2006.

In another indicator of the future, foreign purchasers financed only 39% of the borrowing in the 11 months, leaving American investors to purchase the remaining secutrities. This is in stark contrast to as recent as 2007 when foreigners were buying more Treasuries than the government was issuing, enabling Americans to reduce their Treasury holdings even as the government borrowed hundreds of billions of dollars.

Update 1
Chinese holdings of Treasury bills fell by $34 billion in December 2009, at $755.2 bn, dropping behind Japan (Japan’s holdings rose 1.5 percent in December to $768.8 billion) as the largest holder of US Treasury debt. China's forex reserves stood at $2.4 trillion.

Update 2
"Foreign official" owners own $2.374 trillion in US Treasuries at the end of 2009. This is just under one-seventh of all American government securities outstanding ($7.27 trillion, of which $3.614 trillion was held by all foreign owners, official and private, at the end of 2009).

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