China Cuts US Treasury Holdings By Record Amount

For those who believe that China will eventually use its holdings in long-term US debt to pressure America to keep open trade and not press too much on the value of the yuan, there is the evidence that the People’s Republic sold $21.2 billion in US paper in June. That brought the balance held by the world’s most populous nation down to $839.7 billion.

The sell-off accounted for a record drop in any one month since the Treasury Department started to keep data on the investments.

A less paranoid view of the size of the drop of the holdings is the law of large numbers. China could not have made such a sale a decade ago when the amount of paper it held in US debt was much smaller. It would have had to sell all of its holdings in the 1990s to off-load nearly $20 billion. The law of large numbers rule means that at any time China’s holdings or changes in them could constitute a “record”

The more obvious reason that China has moved out of US debt several months this year is that long-term Treasuries have tiny yields compared to other debt in nations like the UK which pay better coupons. China may step onto the bully pulpit from time to time to attack US deficits, but American paper is still safe enough so that it has kept its flight to quality status, particularly as the EU economy went through trouble earlier this year.

China wants a higher yield on its $2 trillion in currency reserves. US paper does not offer it. That will change over the next few years, American borrowing will increase to fund huge deficits. The yield will increase because the Trasury’s appetite for money will continue to grow. Perhaps China can pressure the US on policy using its holdings in American debt then. For now, the US governent can afford not to care.

Douglas A. McIntyre