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China Still Loves U.S. Bonds, But Not Enough

In spite of the criticism Chinese officials made earlier this year about the dollar being past its prime, and threats to hold fewer dollars and U.S. bonds, China is still buying Treasuries and agencies by the boatload. They're keeping pace with the net $101 billion investment in 2008, but are falling way behind in financing our deficits this year.

About a year ago, China surpassed Japan as the largest owner of U.S. Treasury and agency bonds, after having bought them aggressively for most of this decade. At the end of June China owned $776 billion of Treasury debt, or about a quarter of what's held outside the U.S.

This year was shaping up to be slow in terms of new Chinese investment, but the Treasury reports that in June, China bought $26 billion net in Treasuries and agencies, bringing its total for the year to $46 billion. (The Financial Times also reported that China sold $51 billion in short-term Treasury bills during June.)

So much for the party line earlier this year about moving away from dollars as a reserve currency. China has taken a few steps, but it's decades away from the full-fledged government bond market it will need to be a global currency.

More to the point, China's purchases of U.S. bonds are falling behind this year's enormous issuance, estimated at over $1 trillion, which the Treasury is selling to pay for the various stimulus packages. Net foreign purchases of Treasury securities through June were $207 billion, including record net purchases in June by private investors overseas, at $78 billion.

Floyd Norris, in the Times, illustrates how China is losing share of what it holds in Treasuries:

There were record-sized Treasury auctions in July and August, with strong buying from overseas, so China's holdings may already be higher. But without China's eager participation in financing our budget deficit, interest rates would move considerably higher, and threaten both the government's stimulus efforts and the housing recovery, neither of which can withstand much push-back.

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