Published: Sat, December 17, 2016
Global Media | By Abel Hampton

Japan replaces China as top buyer of US treasuries

Japan replaces China as top buyer of US treasuries

The United States has a new creditor-in-chief.

By the end of October, overall foreign holdings of US Treasury securities dropped to $6.0389 trillion from September's $6.1549 trillion.

China cut its holdings by US$41.3 billion in October and a total of US$127 billion in the past six months, the US Treasury Department said on Thursday.

Japan's move into the top spot came as it also cut its US Treasuries stake, although by a far smaller amount, about US$4.5 billion, to US$1.132 trillion in October.

The data don't account for Treasurys owned by Chinese investors that are held in custody accounts in other countries, which could alter the rankings.

China's foreign reserves, the world's largest stockpile, declined for the fifth straight month in November to $3.05 billion - the lowest since March 2011 - amid support for the currency.

New data released by the Treasury Department Friday morning shows that foreign selling of Treasuries continued in September with a net $63.5 billion in government bonds and notes sold.

China's holdings of US debt has now fallen five straight months.

Beijing has been dumping USA government debt to prop up its currency.

Figures for November and December will be released next year and will show Beijing's stance after Donald Trump won the USA presidential election on November 8. Most foreign central banks' hold the bulk of their foreign currency reserves in dollar-denominated bonds like Treasurys.

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

Beijing purchased U.S. Treasuries to keep its currency weak as it worked to grow its economy, but now it is selling off its foreign reserves to purchase yuan to prevent another severe drop in value.

The Communist government has targeted growth this year in the 6.5 to 6.7 percent range, after expanding at a 6.9 percent rate in 2015, which was the slowest pace in 25 years.

U.S. President-elect Donald Trump's attacks on Beijing over its trade and currency policies, as well as his questioning of the stance of current and past U.S. administrations concerning Taiwan, has triggered fears that China could decide to sell U.S. Treasuries in response.

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 USA dollar keeps climbing and Beijing has to fight to steady the yuan.

But investors shouldn't fret about just yet.

As a result of the selling, Treasury yields have risen. The fact that the increase in yields has been more or less orderly suggests healthy domestic demand, though the trend remains a big risk.

The more important figures will be for November and December, which will not be released until some weeks into next year.

A sharp sell-off could potentially lead to higher US interest rates though, further undermining China's yuan.

"I don't see a big impact on yields", says Quinlan.

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