China Trims Holdings of U.S. Treasury Debt

(AP)  China retained its spot as the biggest foreign holder of U.S. Treasury debt in January although it trimmed its holdings for a third straight month. The string of declines are likely to underscore worries that the U.S. government could face much higher interest rates to finance soaring budget deficits.

The Treasury Department said Monday that China's holdings dipped by $5.8 billion to $889 billion in January compared to December. Japan, the second largest foreign holder of U.S. government debt, also trimmed its holdings but by a much smaller $300 million to $765.4 billion.

Net foreign purchases of long-term securities, a category that includes both government and corporate debt, totaled $19.1 billion in January, as net purchases of private corporate bonds fell by $24.8 billion, the biggest drop on record.

A month ago, Treasury initially reported that China had cut its holdings so sharply that it had lost its top spot as America's largest foreign creditor, a position it had held since it's holdings overtook Japan in September 2008.

However, 10 days later, Treasury released its annual update of the figures. The revised data showed that China, while reducing its holdings, still retained the top spot.

The decline in Chinese holdings is coming at a time of increased tensions between the two nations. Chinese Premier Wen Jiaboa on Sunday rejected American pressure on China to allow its currency to rise in value against the dollar, saying such efforts amounted to a kind of trade protectionism.

The Obama administration is hoping China will resume allowing its currency to rise in value against the dollar as a way of trimming the huge trade gap between the two nations. A cheaper dollar would make American products cheaper in China while making Chinese goods more expensive for American consumers.

Treasury's latest report on international capital flows showed that foreign holdings of Treasury securities increased by $17 billion in January to $3.71 trillion.

While China and Japan decreased their holdings, oil exporting countries boosted their holdings to $218.4 billion, up from $207.4 billion in December, and holdings of Treasury securities in Great Britain rose to $206 billion, up from $178.1 billion.

Economists say that unless foreign demand for U.S. Treasury debt remains strong the interest rates that the government has to pay for that debt could rise sharply, making the U.S. deficit picture look even worse.

Rising rates for government debt would also put upward pressure on private debt, sending borrowing costs up for U.S. businesses and consumers adding another risk to the U.S. economy as it struggles to emerge from the worst recession since the 1930s.

The federal budget deficit hit an all-time high of $1.4 trillion in 2009 and the Obama administration is projecting that this year's deficit will climb even higher to $1.56 trillion.

[checkthepast]

"and the Obama administration is projecting that this year's deficit will climb even higher...." Duh.... democrat spending has to be paid for and there are only two ways.. tax or borrow.

[brianbwb2011]

Well, the bill IS due on Bush's 8 years of unnecessary war, and the oe year of Obama's attempt to get out cleanly, don't tell me now, after supporting them all this time, you now want to welsh on the bill?

Btw, contrary to what the ASPD-afflicted right-wing thinks, and has, since Nixon, practiced, borrowing doesn't pay for anything, it only pushes up the cost with interest.

The only way to pay is via tax revenue.

Think about that the next time some war-mongering right-wing ASPD sufferer starts spewing about bombing other countries, to kill non-existent ghosts.

[brianbwb2011]

hateisafourletterword
ajvw

You are both almost correct, though China won't unpeg, as they know the currency speculators will automatically choose to artificially devalue the yuan, rather than properly devalue the dollar.

Why should the Chinese set themselves up for inflation? It wasn't their wars.

They also realize that this debt is unpayable, as the middle class industrial engine of the US economy no longer exists, no jobs means no tax revenue, means default on debt. They realize that the measures our government must take to fix the problem will be held up by those who enjoy the status quo.

We are actually very lucky that a communist government is holding the debt, as they can control the rate at which they sell it off. Had it been left up to the extreme herd mentality of the capitalist Chinese in the "special economic zones", and in countries like Singapore, they would have dumped it overnight, causing a total collapse of the US economy.

[jgg000101]

1. "properly devalue the dollar". The chinese have manipulated their currency from the get go for their benefit and to the US' detriment.
They loan money in yuan and then devalue the currency so we have to pay them back more in US dollars.

2.China, along with radical islam, is a great threat to the United States. You can be anti-war, but to ignore this reality is ignorant.

3. "they realize this debt is unpayable". absolutely a devised tactic.
what happens when you can't pay your mortgage or car payment?

4. "we are lucky that a communist country is holding our debt". Honestly, I can't believe you would even make this statement unless you are a chinese communist. It's like saying you'd be lucky to have an ax-murderer for a landlord. Lendors want to get paid back. That's how they make money. Banks would much rather you pay your mortgage than end up in the real estate business. China, however, would love to foreclose on the United States.

[hateisafourletterword]

They are either expecting a rating issue on U.S. government debt, inflation sooner that expected, or they are about to unpeg their currency from the U.S. currency.

[ajvw]

or they don't want to be holding .005% percent debt when interest rates are getting ready to sky rocket.