China Holdings of U.S. Debt Rose in 2017 by Most in Seven Years

China increased its holdings of U.S. Treasuries last year by the most since 2010, in a signal its demand for American debt remains resilient.

The value of China’s holdings of U.S. bonds, notes and bills rose by $126.5 billion to $1.18 trillion in December from a year earlier, according to Treasury Department data released Thursday in Washington. China remains the largest non-U.S. holder of debt followed by Japan, whose holdings fell for the fifth straight month in December, to $1.06 trillion after ending 2016 at $1.09 trillion.

China’s Treasury holdings are coming under extra scrutiny after a signal earlier this year that America’s largest creditor may be easing bond-buying amid rising trade tensions.

Chinese officials said last month that as part of a foreign-exchange review, the government is considering slowing or halting purchases of U.S. Treasuries as they became less attractive relative to other assets. A pullback could complicate plans by the U.S. to ramp up borrowing to finance widening budget deficits and efforts by the Federal Reserve to limit market turbulence from gradually unwinding its balance sheet.

Last year’s holdings data “suggests to me that they’re not making any sort of policy change here,” said Thomas Simons, a money-market economist at Jefferies LLC. “They’re still buying Treasuries to try to prevent the yuan from appreciating.”

That might be a “losing battle,” according to Simons, given the weakness of the greenback, which plunged around 9 percent last year based on the Bloomberg dollar index. The yuan has advanced 2.6 percent against the U.S. currency in 2018, after last year recording its first annual gain since 2013.

Threats by U.S. President Donald Trump to crack down on trade with China have sparked concerns that the Asian nation could use American debt as a tool for retaliation.

China’s foreign-exchange holdings clocked a 12th straight monthly increase in January, climbing to $3.16 trillion, lifted by a strong yuan and the use of capital controls to help stabilize outflows.

Belgium’s ownership of Treasuries, often seen as a home to China’s custodial accounts, was little changed at $119.2 billion in December from a year earlier.

Japan’s holdings fell $22.6 billion in December to $1.06 trillion, the lowest level since 2011. Against a backdrop of increased borrowing by the U.S. to fund its growing budget deficit, waning demand from Japan will further stress the Treasuries market, according to Simons.

“Given the expected trajectory of issuance over time, it’s not great that one of your biggest holders is stepping back a bit,” said Simons.

Net foreign purchases of U.S. equities totaled $35.1 billion in December, up from $12.6 billion a month earlier. The data cover last year’s stock market rally, which extended into January before market volatility fueled by inflation worries in February wiped out some of those gains. Total net sales of corporate bonds were $1.25 billion, compared with $28.7 billion in purchases a month earlier.
Source: Bloomberg