The New York Times, in a story published on April 13, reported that China, the biggest holder of U.S. Treasury securities, reduced its U.S. bonds holdings in January and February. But the claim is based on a wrong set of data, and today’s report from the Treasury Department proves it.
Instead of reducing holdings, China increased U.S. Treasury securities holdings to record high in February. To be sure, China did report that its total foreign reserves fell by a record $32.60 billion in January and another $1.4 billion in February. But to draw an equal line between reserves and U.S. bonds holdings completely misses the point.
According to Treasury Department data, Treasury securities, including long-term and short-term bonds, only account for about 40% of China’s total foreign reserves (China holds other U.S. assets, such as securities issued by agencies and companies). In fact, the drop in China’s reserves could be attributed to other reasons, such as falling exports, rising capital outflows, or the drop in value of its euro holdings.
“The [New York] Times improperly tries to extrapolate from reserves to holdings of foreign bonds,” wrote Marc Chandler, global head of currency strategy at investment bank Brown Brothers Harriman, in an email. “And the Times’ shoddy analysis undermines serious attempts to address this important issue.”
So did China really reduce its Treasury securities holdings in January and February? The Chinese government doesn’t disclose a breakdown of its foreign reserves, meaning it doesn’t directly report its U.S. securities holdings. But according to the latest Treasury Department data released today, China increased its Treasury securities holdings by $12.2 billion in January and $4.6 billion in February. At $744.2 billion, China’s securities holdings rank highest in the world. It’s also a record high for Chinese history. Meanwhile, China’s total U.S. asset holdings, including Treasury securities, securities of other agencies and U.S. companies, have increased $323 billion since June 2007 to $1.233 trillion, or about two-thirds of the country’s total foreign reserves. Whoa!
But the big question now is why is China increasing its U.S. holdings at the same time its high-level officials, including the premier and the central bank governor, criticize U.S. inflationary policies and express dismay at the U.S. economic outlook?
The answer is: China doesn’t have another choice. While the U.S. economy might be in big trouble, compared to Europe and Japan, the U.S. is still relatively strong. U.S. securities are still among the most liquid assets in the world. That’s why the dollar still remains strong against the euro and the Japanese yen.
But that doesn’t mean a weaker dollar isn’t possible. If the U.S. continues its inflationary policy, if the U.S. can’t rein in its exploding government deficit, and if banks continue their reckless expansion, the world will have to drop the dollar as a dominant currency, just like it dropped the British pound a few decades ago.