Published: Sun, December 18, 2016
Business | By Patricia Jimenez

Japan tops China as world's largest holder of US Treasuries

A monthly US Department of the Treasury report showed that China held US$1.12 trillion in US government bonds, notes and bills in October, down US$41.3 billion from the previous month and the lowest investment since July 2010.

China's holdings of US bonds fell by more than $4 billion from September to October and are now down roughly $14 billion since October 2015, Treasury data show.

China led a broad-based selloff in Treasuries in October, during which nine of the 10 largest of America's foreign creditor nations pared back their holdings. The last time Japan held the largest stockpile of Treasuries was in February 2015, when it had US$1.224 trillion.

China's reduction of its holdings of Treasuries in the autumn may well have helped it avoid some hefty losses.

Wall Street closely watches Chinese holdings of USA bonds, as China's sizable holdings and purchases of US debt in recent years have been key reasons why interest rates in the USA have stayed low and near historic lows.

China's foreign currency war chest fell to its lowest level in more than five years in November.

Japan's holdings eclipsed China's for just one month in February past year, the first time since the 2008 global financial crisis.

A strong U.S. dollar has affected China's capital flows and caused the recent depreciation of the yuan, according to economists. As the Federal Reserve increases US interest rates, it continues to challenge the value of the yuan, which forces China to increase its own national debt as it keeps yuan demand high by buying up the currency.

But if China does step up the pace of selling too much, Kohli believes the Federal Reserve would step in as the buyer to calm the market and prevent US borrowing costs from skyrocketing.

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It is a sign that China has used some of its holdings to support the yuan, which is under pressure from capital outflows.

Some Chinese government economists have put the minimum prudent level of reserves at somewhere between $1.62 trillion to $2 trillion.

Some traders believe the $3 trillion mark is a key psychological level for the PBOC, but it risks rapidly churning through its remaining stockpile of reserves if the US dollar keeps climbing and Beijing has to fight to steady the yuan.

China is no longer the biggest foreign owner of USA debt.

For years, China spent trillions of yuan buying Treasuries as a way of stopping its currency from getting too strong even as its economy grew rapidly.

"This (dumping USA debt) is a bad idea".

The yuan has lost 7% of its value vs. the USA dollar this year.

However, Chinese government policy advisers, who declined to be identified because of the sensitivity of the subject, say they believe that's highly unlikely.

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