China trims holdings of US Treasury debt by 1.3 percent in February, fourth straight drop

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China trims holdings of US Treasurys by 1.3 pct.

WASHINGTON — China trimmed its holdings of U.S. Treasury debt 1.3 percent in February, the fourth consecutive decline. Those reductions are raising concerns that the U.S. government could face higher interest rates to finance its soaring budget deficits.

The Treasury Department said Thursday that China’s holdings dropped $11.5 billion to $877.5 billion. That still left China as the largest foreign holder of U.S. Treasury debt. Japan retained the No. 2 spot with $768.5 billion, a drop of 0.4 percent from the January level.

Net foreign purchases of long-term securities, a category that includes both government and corporate debt, totaled $47.1 billion in February. That compared with an increase of $15 billion in January.

Analysts said the rebound in net purchases in February was a good sign that foreigners continued to be interested in U.S. debt securities even in a period when Treasury debt has soared, reflecting the record budget deficits.

Brian Bethune, chief U.S. financial economist at IHS Global Insight, said while the demand for U.S. debt was not as robust as it has been in the past it was “still reasonable and not a concern for funding the U.S. current account deficit or the U.S. dollar.”

Win Thin, senior currency strategist at Brown Brothers Harriman & Co., said he believed that the March report could well show a rebound in purchases by China. He said part of the changes reflected a decision by China to rebalance its holdings away from shorter-term Treasury bills.

“China is still a steady buyer of U.S. Treasury notes and bonds but has been paring back its Treasury-bill holdings,” he said in a research note.

The Treasury report showed that in contrast to the declines in holdings of Treasury securities by China and Japan, holdings by Britain jumped 12.2 percent to $321.7 billion. Hong Kong also recorded a large increase of 4 percent to $152.4 billion.

Private analysts said that a likely explanation for at least a part of the drop in Chinese holdings is that Chinese investors are buying their securities through other countries such as Britain and the ownership is being recorded with those countries rather than with China. That would overstate the drop in demand that is occurring with China.

Once a year, the Treasury Department does an adjustment of the data to sort out ownership of the securities by nationality rather than the country where the purchases were made.

The latest adjustment released in February showed that China had retained its top ranking as the largest foreign holder of U.S. Treasury securities. The adjustment revised data released just 10 days earlier which showed China had cut its holdings so sharply that it had dropped from the No. 1 spot.

That adjustment reallocated bond holdings purchased in Britain and other countries to China to reflect the investor’s correct home country.

Economists say that unless foreign demand for U.S. Treasury debt remains strong, the interest rates that the government has to pay for that debt could rise sharply, making the U.S. deficit picture look even worse.

Rising rates for government debt would also put upward pressure on private debt. That would send borrowing costs up for U.S. businesses and consumers and add another risk to the U.S. economy.

The debate about what China might be doing with its holdings is occurring at a time when China is facing growing pressure from the United States to allow its currency, the yuan, to rise in value against the dollar.

President Barack Obama raised the subject during one-on-one meeting he had Monday with Chinese President Hu Jintao. On Wednesday Federal Reserve Chairman Ben Bernanke made his strongest comments on the need for China to allow a revaluation, which he said would be in China’s interests.

He said it would be good for China to allow for more currency flexibility to “address inflation and bubbles within their own economy.” Bernanke made his comments in response to questions from Sen. Charles Schumer during a hearing of the congressional Joint Economic Committee.

Schumer, D-N.Y., is pushing legislation that would punish China with economic sanctions if the country does not move faster to allow the yuan to rise in value. American manufacturers contend the Chinese currency is undervalued by as much as 40 percent, making Chinese goods cheaper for American consumers and U.S. products more expensive in China.

There is a growing expectation that China will allow its currency to resume apreciating against the dollar, possibly before Obama, Hu and other leaders of the Group of 20 nations meet for talks in Toronto in June.