China cedes top US creditor crown to Japan

BEIJING • China has been dethroned by Japan as the top holder of United States government debt as the Chinese central bank has dipped into its foreign exchange reserves to support the yuan, while its Japanese counterpart has been content to allow the yen to weaken.

Investors are paying close attention to declines in China's holding of US Treasuries as any sharp sell-off could add further upward pressure to US interest rates, which in turn can undermine the Chinese currency.

Figures for foreign ownership of US Treasuries in October released late on Thursday confirmed the shift, with China's stock of US federal debt plunging to the lowest level in more than six years.

On Wednesday, the US Federal Reserve raised interest rates and signalled a faster pace of rate increases next year, sending yields on shorter-dated Treasuries to their highest levels in more than five years. US President-elect Donald Trump's attacks on Beijing over its trade and currency policies, as well as his questioning of the stance of current and past US administrations concerning Taiwan, has triggered fears that China could decide to sell US Treasuries in response.

However, Chinese government policy advisers, who declined to be identified because of the sensitivity of the subject, say they believe that's highly unlikely.

The People's Bank of China, the nation's central bank, and the State Administration of Foreign Exchange, the foreign exchange regulator, did not respond to faxed requests for comment.

In October, China's holdings of US Treasuries fell by US$41.3 billion (S$59.5 billion) to US$1.115 trillion, according to data from the US Treasury Department. It marked the fifth straight monthly drop and brought the total China has sold off over the previous 12 months to US$139.2 billion, the third largest annual decline ever.

The more important figures will be for November and December, which will not be released until some weeks into next year. They will show what happened after Mr Trump won the US presidency.

Japan's move into the top spot came as it also cut its US Treasuries stake, although by a far smaller amount, about US$4.5 billion, to US$1.132 trillion in October. Its holdings have fallen by about US$17.3 billion from the previous October.

Japan's holdings eclipsed China's for just one month in February last year, the first time since the 2008 global financial crisis.

Economists say they expect China to continue to reduce its holdings of US government debt, considered the most liquid dollar assets, to help defend the yuan, but a big sell-off looks unlikely.

REUTERS

A version of this article appeared in the print edition of The Straits Times on December 17, 2016, with the headline 'China cedes top US creditor crown to Japan'. Print Edition | Subscribe