Why has China increased US debt holdings for two straight months?

Key Words: US debt; U.S. Treasury securities; US government debt; creditors

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China increased its holdings of U.S. Treasury securities by 200 million U.S. dollars last November. The country held nearly 1.2 trillion U.S. dollars' worth of Treasury securities by the end of last November, and remained the largest single foreign holder of U.S. government debt, according to a Treasury International Capital report released by the U.S. Treasury Department on Jan. 16. China also increased U.S. debt holdings by 16.3 billion U.S. dollars last October, revised data revealed.

Experts said that increases or cuts in China's U.S. debt holdings are normal market behavior, and should not be interpreted politically.

Market demand for U.S. government debt rebounds

Despite the drop in U.S. Treasury yields, most foreign creditors increased their holdings of U.S. government debt last November. According to data from the Department of the Treasury, foreign holdings of Treasury securities rebounded last November, during which foreign governments and private investors bought a net total of 26.4 billion U.S. dollars' worth of Treasury securities, hitting a three-month high. Net foreign holdings of long-term Treasury bonds increased 52.3 billion U.S. dollars last November, after decreasing 1 billion U.S. dollars last October

China and Japan are the largest and second largest foreign holders of U.S. government debt. The U.S. debt held by the United Kingdom and Caribbean countries increased the most last November.

China mainly increased holdings of Fannie Mae and Freddie Mac bonds. Data revealed it increased net holdings of long-term Treasury bonds by 894 million U.S. dollars last November.

A breakdown of the holdings showed that it reduced holdings of long-term Treasury bonds by 902 million U.S. dollars, increased Fannie Mae and Freddie Mac bonds by nearly 1.1 billion U.S. dollars, increased holdings of corporate bonds by over 1.2 billion U.S. dollars, and reduced holdings of corporate stocks by 520 million U.S. dollars.

Analysts attributed the rebound in foreign demand for U.S. government debt to the risk avoidance awareness raised by the global economic slowdown and the U.S. policy of quantitative easing.

Gennadiy Goldberg, an economist at TD Securities in New York, noted that the Federal Reserve announced in September that it would buy 40 billion U.S. dollars in mortgage securities each month, which temporarily reduced foreign demand for U.S. government debt. Most foreign investors then turned their eyes to mortgage securities.

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