China Holdings of US Treasuries Revised Up 30%; An Unsustainable Model

By: Mike Shedlock | Tue, Mar 1, 2011
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Annual revisions released Monday show that China's holding of US treasuries is 30% greater than reported just weeks ago.

I am not surprised given that persistent rumors of China dumping treasuries made little mathematical sense from a balance of trade standpoint. Instead, I suggested China was accumulating treasuries via trading desks in the UK. We now see that is precisely the case.

Please consider China's holdings of US debt jump 30 percent

China, the biggest buyer of U.S. Treasury securities, owns a lot more than previously estimated.

In an annual revision of the figures, the Treasury Department said Monday that China's holdings totaled $1.16 trillion at the end of December. That was an increase of 30 percent from an estimate the government made two weeks ago.

China was firmly in the top spot as the largest foreign holder of U.S. Treasury debt even before the revisions. But the big increase in Chinese holdings could ease fears that Chinese investors might begin dumping their U.S. holdings. Such a development could send U.S. interest rates rising. That would slow America's economic recovery and increase Washington's costs for financing the $14.3 trillion national debt.

China and Britain were the countries with the biggest revisions in the new report.

The amount of U.S. Treasury securities held by Britain fell to $272.1 billion in the new report. That's a drop of $269.2 billion from the last monthly report which put the Britain's holdings of U.S. debt at $541.3 billion. The holdings of the two countries often show big revisions when the annual report is released.

The reason for the change is that Chinese investors who purchase their Treasury securities in London are often counted as British investors. The more detailed annual report does a better job of tracking the countries in which investors reside as opposed to the location where investors make their purchases.

Even with the revision, Britain remained the third largest holder of U.S. Treasurys.

Japan had the second highest foreign holdings, totaling $882.3 billion at the end of December. The revision was only slightly below the original estimate.

The total foreign holdings of Treasury debt stood at $4.44 trillion at the end of December, according to the new report. That's up 1.5 percent from the estimate made two weeks ago. About two-thirds of U.S. Treasurys owned overseas are held by foreign governments and central banks.


Thoughts on Dumping Treasuries

Please note the comment in the article: "The big increase in Chinese holdings could ease fears that Chinese investors might begin dumping their U.S. holdings. Such a development could send U.S. interest rates rising. That would slow America's economic recovery and increase Washington's costs for financing the $14.3 trillion national debt."

The odds of China dumping US treasuries are tiny. The last thing China wants to do is put massive upward pressure on the Yuan, and dumping treasuries would likely do just that.

Moreover, please consider the basic math. The US runs a trade deficit, so other countries accumulate dollars. For more on the essential math, please see US Dollar About to Lose Reserve Currency Status - Fact or Fantasy?

Given that dollars held by foreign central banks earn no interest, governments buy other US assets instead, notably US treasuries. Last year China's bought massive amounts of US treasuries via UK banks or brokers.


Unsustainable Model

Although it is relatively easy to explain what is happening and why, it's also important to know the existing global currency hegemony will eventually collapse because the current model is unsustainable.

Countries cannot run massive deficits forever.

However, a global currency crisis does not necessarily start with the US dollar, nor does a crisis necessarily happen any time soon. A major crisis starting with the Euro, the Yen, the British Pound, or the Yuan is at least as likely, and the timeframe can be months or years away.

Whenever it happens, don't be caught without gold.

 


 

Mike Shedlock

Author: Mike Shedlock

Mike Shedlock / Mish
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Mike Shedlock

Michael "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Visit http://www.sitkapacific.com/ to learn more about wealth management for investors seeking strong performance with low volatility.

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