The Treasury Department said Thursday that China's holdings dropped $11.5 billion to $877.5 billion. That still left China as the largest foreign holder of U.S. Treasury debt. Japan retained the No. 2 spot with $768.5 billion, a drop of 0.4 percent from the January level.
Net foreign purchases of long-term securities, a category that includes both government and corporate debt, totaled $47.1 billion in February. That compared with an increase of $15 billion in January.
By contrast to the declines in holdings of Treasury securities by China and Japan, holdings by Britain jumped 12.2 percent to $321.7 billion. Hong Kong also recorded a large increase of 4 percent to $152.4 billion.
Treasury analysts said that one explanation for the changes may be that Chinese investors are buying their securities through Britain and Hong Kong. Once a year, the government does an adjustment of the data to sort out ownership of the securities by nationality rather than the country where the purchases were made.
The latest adjustment released in February showed that China had retained its top ranking as the largest foreign holder of U.S. Treasury securities. The adjustment revised data released just 10 days earlier which showed China had cut its holdings so sharply that it had dropped from the No. 1 spot.
That adjustment reallocated bond holdings purchased in Britain and other countries to China to reflect the investor's correct home country.
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. That would send borrowing costs up for U.S. businesses and consumers and add another risk to the U.S. economy.