China has sold a record amount of US debt, falling behind Japan to become the second-biggest holder of US treasuries. The move raises speculation that the Chinese are turning bearish as Barack Obama, the US president, raises borrowing to unprecedented levels to sustain economic growth.
China has expressed concerns about the amount the US is borrowing to fund growing budget deficits, and the security of its dollar-denominated assets. In a move to cut the deficit, Mr Obama has picked the republican former senator Alan Simpson and the former Clinton administration official Erskine Bowles to lead a commission into the problem. "Erskine and I have a philosophy that's very simple: We're going to move this issue forward," Mr Simpson said.
Mr Obama wants the commission to recommend specific steps to rein in the deficit, which is forecast to hit a record US$1.6 trillion (Dh5.87 trillion) this year. News of the commission came after China sold more than $34bn in short and long-dated treasuries in December, bringing its total holdings down to $755.4bn from $789.6bn the month before, US Treasury data released yesterday shows. The decline is the most since treasury data started in 2000. Japan, by adding $11.5bn, raised its total holdings to $768.8bn, surpassing China as America's biggest creditor for the first time since August 2008.
The Chinese government had been buying dollars to prevent appreciation in the yuan and sustain exports amid the global economic slowdown, keeping the yuan at about 6.83 against the greenback since July 2008. Some analysts fear a waning Chinese appetite for US debt could push up treasury yields and weaken a fragile US recovery. "Net-net this data is only going to add to second guessing of Chinese behaviour and raise concerns that they are not showing much enthusiasm for US dollar-denominated paper," said Alan Ruskin, the chief international strategist of RBS Securities. Win Thin, a senior currency strategist in New York at Brown Brothers Harriman, said: "If this scale of selling is sustained, then it would suggest that China is taking larger steps to diversify than it has in the past."
China's treasury holdings peaked at $801.5bn in May last year. Reserve assets climbed to a record $2.4 trillion in December. Ties between China and the US have been tested several times recently on issues including currency, trade, internet censorship, human rights and US arms sales to Taiwan. Mr Ruskin said China had sold about $45bn in treasury debt in the past five months, calling it "a long enough period to hint strongly at a trend". But the data showed the US had attracted overall net inflows of $60.9bn. Treasuries of all maturities saw a net inflow of $69.9bn, and net inflows into stocks rose to $20.1bn from $9.6bn in November. But US corporate debt suffered a net outflow.
Strong US treasury buying was also seen from Britain, Luxembourg and Hong Kong, the data showed. Mr Win called the data "a cause for modest concern that bears watching", but added, "we do not think the big global reserve managers are dumping US dollar assets on a sustained basis." He said euro assets were not an attractive alternative with markets worried that Greece might not be able to make the spending cuts necessary to get its debt under control.
EU ministers have offered Greece a pledge of support but stressed that Athens may need to commit to even more drastic spending and wage cuts. Meanwhile, net outflows from treasury bills hit a record $53bn, with China leading much of the selling, Mr Ruskin said. But the shift in to the long end of the curve may reflect more confidence in the US economy as foreigners cut safe-haven purchases of bills.
And US treasury officials said earlier this month that they ended December "with an avalanche of cash", primarily mainly from repayment of Troubled Asset Relief Programme funds by banks such as Citigroup, Bank of America and Wells Fargo. Much of this was used to pay down treasury bills as the government tried to stay under the debt limit and shifted more of its borrowing to longer-dated coupons. * with Bloomberg and Reuters