China increased its holdings of US Treasuries last year by the most since 2010, in a signal its demand for US debt remains resilient.
The value of China’s holdings of US bonds, notes and bills rose by US$126.5 billion to US$1.18 trillion in December last year from a year earlier, according to Treasury Department data released on Thursday in Washington. China remains the largest non-US holder of debt followed by Japan, whose holdings fell for the fifth straight month in December, to US$1.06 trillion after ending 2016 at US$1.09 trillion.
China’s Treasury holdings are coming under extra scrutiny after a signal earlier this year that the US’ 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 US Treasuries as they became less attractive relative to other assets. A pullback could complicate US plans 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,” Jefferies LLC money-market economist Thomas Simons said. “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 US currency this year, after last year recording its first annual gain since 2013.
Threats by US President Donald Trump to crack down on trade with China have sparked concerns that the Asian nation could use US debt as a tool for retaliation.
China’s foreign-exchange holdings clocked a 12th straight monthly increase last month, climbing to US$3.16 trillion, lifted by a strong yuan and the use of capital controls to help stabilize outflows.
Japan’s holdings fell US$22.6 billion in December last year to US$1.06 trillion, the lowest level since 2011. Against a backdrop of increased borrowing by the US 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,” Simons said.
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