February 16, 2010 | 1518 GMT
Stratfor
The U.S. Treasury Department reported Feb. 16 that foreign holdings of U.S. Treasury securities — that is, government debt — increased by $16.9 billion in December 2009. However, China, previously the leading holder of U.S. debt, shaved its holdings of short-term securities (T-bills) by $34.2 billion for a 4.3 percent drop in total holdings, putting it behind Japan as the largest holder of U.S. debt for the first time since September 2009. When the global economic situation is uncertain, foreign purchases of U.S. debt rise, as foreign players look to hold assets that are safe, and the U.S. economy is seen as resting on the most secure geopolitical fundamentals. U.S. debt is one of the largest pools of liquid assets, allowing investors to come and go with ease and hedge against risks in other markets. Also, foreign players deal in U.S. dollars for much of their trade and therefore avoid exchange rate risk in purchasing U.S. debt.
China has for more than a year been the leading buyer of U.S. Treasury debt — especially short-term debt, helping to keep interest rates low in a key export market. However, the Chinese have also threatened to slow purchases or reduce holdings as a warning to the United States. Sino-American relations have been souring in recent months, with trade and economic tensions rising and the United States pushing for sanctions on Iran that could threaten China’s energy security. China was also displeased in December 2009 over the approach of a new U.S. arms deal with Taiwan, which has since been approved and sparked a controversy.
While China may reduce its holdings of U.S. debt in order to send a signal to Washington (though this is not necessarily the only reason it would do so), it has no intention of selling debt to the point that it wrecks the U.S. economic recovery, since doing so would destroy China’s own economic and socio-political stability.
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