China’s Treasury Holdings Approach 2010 Record

China, the largest foreign creditor to the U.S., increased its ownership of Treasuries in October to almost the record level reached in July 2011 after the Federal Reserve unexpectedly opted not to slow bond buying.

Holdings rose $10.7 billion, or 0.8 percent, to $1.304 trillion, according to Treasury Department data released yesterday. China held a record $1.314 trillion in July 2011. Total foreign holdings of Treasuries rose $600 million, or 0.01 percent, in October to $5.65 trillion.

Fed officials surprised traders and roiled markets across the globe on Sept. 18 by maintaining $85 billion in monthly purchases. Policy makers won't start curtailing quantitative easing this week either, according to 66 percent of economists surveyed Dec. 6 by Bloomberg. China's demand for Treasuries rose as foreign currency reserves jumped 4.7 percent in the July-September period and the People's Bank of China sought to keep the yuan within its managed trading range.

“As money enters that country, that gets turned into intervention, and that intervention gets turned into Treasuries,” said John Briggs, a U.S. government bond strategist at RBS Securities Inc. in Stamford, Connecticut, one of 21 primary dealers that trade with the Fed. “When they didn't taper, a lot of pressure came off of those markets and some money flowed into emerging markets, including China.”

China's yuan traded at 6.0712 per dollar as of 11:41 a.m. in Shanghai, from 6.0715 yesterday, China Foreign Exchange Trade System prices show. The currency has appreciated 2.6 percent against the greenback this year and touched a 20-year high of 6.0703 on Dec. 10.

Borrowing Limit

U.S. government securities held by overseas investors have increased 1.4 percent this year, on track for the slowest rise since the Treasury began releasing full-year data in 2001.

Foreign holdings rose even as U.S. lawmakers faced an impasse on spending and borrowing limits, which lasted until a day before the Treasury's statutory borrowing limit was reached Oct. 17.

“It was some pent-up buying post shutdown resolution,” said Shyam Rajan, an interest-rate strategist in New York at Bank of America Corp., a primary dealer. “People wanted to buy after the no-taper decision, but probably didn't go all-in because they had the debt ceiling and shutdown to be resolved.”

Treasuries held in custody for foreign central banks by the Fed have climbed 1.9 percent, or $54.8 billion, in the eight weeks since Oct. 16, central bank data show.

Japan, the second largest foreign lender to the U.S., reduced its holdings of U.S. government debt for the first time since June by $3.7 billion, or 0.3 percent, to $1.17 trillion.

China's Annual Increases

China has increased its holdings 6.9 percent this year through October and is on track for the biggest gain since its stake in Treasuries rose 30 percent in 2010.

PBOC Deputy Governor Yi Gang said last month that it's no longer in the nation's interest to increase its foreign-exchange reserves. The holdings are the world's largest and surged $166 billion in the third quarter, to a record $3.66 trillion.

The monetary authority will “basically” end normal intervention in the currency market and broaden the yuan's daily trading limit, PBOC Governor Zhou Xiaochuan wrote in an article in a guidebook explaining reforms outlined at a November Communist Party meeting. The exchange rate is allowed to diverge a maximum 1 percent from the central bank's daily fixing, which was set at 6.1108 per dollar today.

Japan has increased its position in Treasuries by 5.7 percent through October and is on track for its sixth annual rise in holdings of the debt.

Hong Kong boosted its Treasury ownership by 7.8 percent or $9.8 billion, to $136.3 billion, Treasury data show. Hong Kong's stake in the securities had fallen 15.4 percent to $120 billion in July from $141.9 billion at the end of 2012.

Luxembourg's position in Treasuries fell 5.5 percent, or by $7.8 billion, to $133.3 billion. U.S. government securities held by investors in the country have declined 14 percent since December 2012 from $155 billion.

Holdings by members of the Organization of Petroleum Exporting Countries fell 3.7 percent to $236.6 billion, the lowest since May 2011.

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