China's holding of US bonds drops first time in 11 months


July 15, 2010 Updated Jun 15, 2009 at 6:02 PM CDT

Mainland China's holding of US Treasury bonds fell for the first time in nearly a year, the US government said Monday after Chinese leaders voiced fear over the soaring US budget deficit.

Other emerging powers Russia and Brazil have also trimmed their US bond holdings, the US Treasury said in its monthly international capital data report.

The three nations plan to purchase tens of billions of dollars in bonds to be issued by the International Monetary Fund (IMF) for the first time, in what is seen as part of moves by the trio to diversify from large dollar holdings.

Beijing owned 763.5 billion dollars in US Treasury securities in April, the lowest level since ramping up purchases in June 2008, the Treasury data showed. The April holdings fell from 767.9 billion dollars in March.

They do not include US Treasury bond holding in Hong Kong, China's special administration region, which climbed to 80.9 billion dollars in April from 78.9 billion dollars the previous month.

The decline in the China holding "seems to stem from net selling of Treasury bills," said Chirag Mirani of Barclays Capital Research.

On the whole, foreigners decreased holdings of Treasury bills by 44.5 billion dollars in April, the data showed.

As the largest holder of US Treasury bills, which are crucial to funding Washington's multi-trillion-dollar recovery plans, China had expressed concerns recently over what it called the safety of its dollar-linked assets.

US Treasury Secretary Timothy Geithner traveled to Beijing about two weeks ago to reassure Chinese leaders, saying their money is "very safe" despite the US budget deficit, which he pledged to cut.

But state Chinese media expressed opposition to Beijing's policy of buying massive amounts of US debt, saying the value of China's assets could be battered as the financial crisis continues.

According to an online poll, 87 percent of respondents considered China's dollar assets unsafe, the Chinese newspaper Global Times reported this month.

The United States has been running large budget shortfalls since the tenure of Democratic President Barack Obama's Republican predecessor George W. Bush.

Obama administration officials estimate a deficit of 1.841 trillion dollars for the 2009 budget and 1.258 trillion dollars in 2010.

In recent weeks bond markets have been roiled by worries about the rise in US debt, as China, Brazil and Russia said they planned to purchase bonds to be issued by the IMF as part of the fund's move to boost resources to help crisis-hit nations.

China was eyeing purchases of 50 billion dollars in IMF bonds while Russia and Brazil were considering those for 10 billion dollars each.

Brazil cut its US bond holdings to 126.0 billion dollars in April from 126.6 billion dollars the previous month while Russia reduced its ownership to 137.0 billion dollars from 138.4 billion dollars.

"While it may seem that they are going to continue to buy US dollars and buy US debt, they are telling the world they are actively seeking alternatives," said Andrew Busch, a forex strategist with BMO Capital Markets.

"There may not be many alternatives now, but over long enough time frames there will be," he said.

The new bonds will be offered in the IMF accounting unit, Special Drawing Right (SDR), whose value is based on a basket of currencies, rebalanced daily, in which the dollar represents only a 41 percent share.

It is the dollar's relative weakness in SDRs that has raised market concerns that some countries are seeking to distance themselves from the greenback, the world's reserve currency.

The latest Treasury data also showed that net overseas purchases of US long-term securities dropped to 34.3 billion dollars in April from 56.4 billion dollars the previous month.

Brian Bethune, an economist with IHS Global Insight, said it underscored a "rebalancing of risk perceptions" and "should not raise too many alarm bells."

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