China Reduces Holdings of U.S. Treasuries to Lowest Level Since June 2010

By Cordell Eddings and Daniel Kruger - Feb 16, 2012 5:28 AM GMT+0700

China, the largest foreign lender to the U.S., reduced its holdings of Treasuries in December to the least since June 2010 amid efforts to assist Europe in addressing its debt crisis.

The world’s second-largest economy decreased its U.S. debt securities by $31.9 billion from November, or 2.8 percent, to $1.11 trillion, according to Treasury Department data released yesterday. Its position in longer-term notes and bonds also fell $32.5 billion, or 2.8 percent, to $1.1 trillion, the least since June 2010. Japan, the second biggest buyer, increased its holding by $3.5 billion to $1.04 trillion.

“We continue to see Chinese Treasury holdings trending lower as they are acting on their desire for diversification and as they may get more involved in the situation in Europe,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut.

China’s policy makers have advocated diversification of the nation’s foreign exchange reserves away from U.S. assets. China may support Europe through channels such as the International Monetary Fund, the European Financial Stability Facility and the European Stability Mechanism, said People’s Bank of China Governor Zhou Xiaochuan.

European Assets

“China will always adhere to the principle of holding assets of EU sovereign debt,” Zhou said in Beijing yesterday. “We would participate in resolving the euro debt crisis,” he said.

Chinese Officials, including central bank adviser Li Daokui, have urged diversification of the nation’s foreign exchange reserves. The Asian nation will “seek diversification in the management of reserve assets, strengthen risk management, and minimize the negative impacts of the fluctuations in the international financial market on the Chinese economy,” Zhou said in August.

Foreign investors held 47.6 percent of outstanding public Treasury debt as of December, the smallest proportion since October 2006, Treasury data show.

Net buying of long-term equities, notes and bonds totaled $17.9 billion during the month compared with net purchases of $61.3 billion the previous month, the Treasury Department said. Including short-term securities such as stock swaps, foreigners bought a net $87.1 billion in December compared with net buying of $42.9 billion the previous month.

China increased its position in shorter-term bills by $600 million to $2.9 billion. The U.S. updated data on Feb. 28, 2011 to show China’s Treasury investments in October 2010 were a record $1.18 trillion, 30 percent more than the initial estimate of $906.8 billion.

“Overall flows were weak for the U.S. and the Chinese tactical selling reflected that as Treasuries were giving back very little,” said Aaron Kohli, an interest-rate strategist BNP Paribas SA in New York, one of 21 primary dealers that trade directly with the Federal Reserve. “As yields rise, look for China to buy Treasuries again.”

Treasuries have lost 0.1 percent this year after returning 9.8 percent last year, according to a Bank of America Merrill Lynch index.

To contact the reporter on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net