China surpasses Japan as US biggest creditor; Why China has been gobbling up U.S. Treasury bills

China surpasses Japan as America’s biggest creditor

Irshad Salim — China is once again America’s top creditor- it holds a whopping $1.15 trillion in Treasury Bills.

According to U.S. government data on foreign holdings of Treasuries for June, released on Aug. 15, the value of China’s holdings further rose by $44.3 billion. That allowed China to eclipse Japan as the top holder of Treasuries, pushing its total to some $1.147 trillion.

Japan owned $1.09 trillion, a decrease of $20.5 billion from its total in May.

The two countries account for more than a third of all foreign ownership of Treasuries, which gained by $47.7 billion in June to $6.17 trillion, the figures showed.

From the data, the rest of the top five US creditors by the end of June are Ireland, Brazil and Cayman Islands holding $302.5 billion, $269.7 billion and $254 billion respectively.

Thomas Simons, a senior economist at Jefferies LLC in New York, said to Bloomberg that China’s holdings may continue to increase in the coming months, given strong trade flows between US and China boosting more treasury demand.

Strong trade flows between the two countries have helped the country’s exporters, boosting China’s demand for U.S. sovereign debt, said Simons. “China’s holdings will likely continue to increase in the coming months.”

“I don’t think China’s done buying, given their trade balance with the U.S.,” Simons said. “The trade flows are going to create more demand for Treasuries.”

China’s previous buying spree came as Beijing attempted to cap the rise of the yuan.

Torsten Slok, chief international economist at Deutsche Bank, says the dollar’s recent weakness allowed China to return to the market as a buyer of Treasuries, signaling to speculators “that this can be a two-way street. It’s not only one-way where we’re selling Treasuries” to protect the yuan.

China’s previous buying spree came as Beijing attempted to cap the rise of the yuan against the U.S. dollar in 2015 followed by China sharply devaluing the yuan. China aggressively sold Treasuries as foreign-exchange plummeted. Chinese authorities sold dollars and bought yuan to stave off further depreciation of its currency.

Beijing had to sell Treasuries to keep the yuan from depreciating too much, said Slok.

Slok says the dollar’s recent weakness allowed China to return to the market as a buyer.

So China’s future buying interest might depend largely on the dollar. If it remains weak, Chinese demand is likely to continue, Slok says.

China is still likely to prefer to see the yuan strengthen against the dollar, given the political scrutiny on China’s still large bilateral trade surplus with the U.S., he says.

David Ader, chief macro strategist at Informa Financial Intelligence, is skeptical that China has made a lasting shift. Data on foreign Treasury holdings are notoriously noisy and murky, he said report MarketWatch. “I would be a little bit cautious about overreading it. Let’s see if it continues.”

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