Foreign demand for long-term US financial assets jumps sharply even as China holdings dip

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Foreign demand for US assets rises in November

WASHINGTON — Foreign demand for long-term U.S. financial assets jumped sharply in November, rising to the highest level in more than two years even though China’s holdings of Treasury securities fell.

Analysts viewed the big increase as a sign of renewed optimism among foreign investors about economic growth prospects in the United States. Continued strong demand for U.S. debt is critical to financing America’s soaring budget deficits and keeping domestic interest rates low enough to support a sustained economic recovery.

The Treasury Department said Tuesday that foreigners purchased $126.8 billion more in assets than they sold in November, the largest gain since an increase of $128.9 billion in October 2007.

China, the largest holder of U.S. Treasury securities, trimmed its holdings by $9.3 billion in November, pushing them down to $789.6 billion, the smallest level since last June.

Japan, the second largest owner of U.S. Treasuries, boosted its holdings in November by $11.4 billion to $757.3 billion and a number of other nations also increased their holdings as well.

Private purchases of U.S. domestic long-term securities, a category that includes government and corporate investments, jumped to a record $96 billion in November, up from a net increase of $28.4 billion in October.

Analysts said this sharp jump in demand for U.S. investments reflected rising optimism among foreign investors about U.S. growth prospects.

“On a relative basis, the United States looks good,” said Brian Bethune, chief U.S. economist at IHS Global Insight. “Investors are realizing that the U.S. economy is well ahead of Europe and Japan in terms of pulling out of the recession. That means U.S. assets look more attractive.”

Some economists said the boost for the United States could also represent in part a flight to safety by investors worried about debt problems in Dubai and such European nations as Greece.

Analysts did not see the one-month drop in China’s holdings of U.S. Treasury securities as significant. But Win Thin, senior currency strategist for Brown Brothers Harriman & Co. in New York, said it would be important to watch developments in China in coming months to see if a trend is developing. Chinese government officials have been particularly vocal in expressing their unhappiness with the surging U.S. government deficit.

The amount of U.S. Treasuries held by Britain rose to $277.5 billion while the holdings of Russia climbed to $128.1 billion. Holdings of U.S. Treasuries by Brazil and Hong Kong also rose but the holdings of oil exporting countries fell slightly in November.

China’s holdings are a result of the huge trade deficits the United States runs with China. The Chinese take the dollars Americans pay for Chinese products and invest them in Treasury securities and other dollar-denominated assets.

American manufacturers argue that China’s huge dollar reserves reflect a strategy by the Chinese government to keep its currency artificially low against the dollar as a way to boost Chinese exports and dampen demand in China for American products. A stronger dollar compared to the yuan makes Chinese goods cheaper in the United States and U.S. products more expensive in China.

On a visit to China in November, President Barack Obama urged the Chinese government to allow its currency to rise in value against the dollar while Chinese officials continued to express concerns about the soaring U.S. budget deficit.

The U.S. deficit hit an all-time high of $1.42 trillion for the 2009 budget year and the administration in its August budget review projected the deficit would climb even higher to $1.5 trillion this year.

The administration has said it is important to spend heavily to attack the worst recession since the 1930s but officials have said that Obama will make deficit reduction a key priority once the recovery has gained momentum.