Expert Zone

Straight from the Specialists

U.S. debt and China

By Derek Scissors
March 1, 2012

(The views expressed in this column are the author’s own and do not represent those of Reuters)

The U.S. Department of the Treasury has released an initial estimate of foreign holdings of U.S. securities, including Treasury bonds, as of June 30, 2011. This estimate serves as a correction of monthly figures Treasury publishes, known as the Major Foreign Holders series.

There are three implications of the new data from Treasury:

China continued direct purchases of large quantities of Treasury bonds from June 2010 to June 2011.

The monthly media reporting of the Major Foreign Holders series continues to be misleading and should be largely ignored. True Chinese holdings of Treasuries and other American assets continued to be difficult to pin down.

The Major Foreign Holders series has frequently shown China reducing its stash of directly held Treasury bonds from one month to the next. But year after year, this turns out to be wrong. In fact, China again increased its direct holdings of Treasuries.

Major Foreign Holders previously showed Chinese holdings of American Treasury bonds as $1.17 trillion in June 2011. The new, more accurate series shows the figure as $1.30 trillion. This correction implies China purchased $194 billion in Treasuries on a net basis between June 2010 and June 2011.

Treasury addressed the question of why one set of figures contradicts the other: “It should be noted that in many cases it is not possible to accurately determine the country of residence.… [E]xcessive foreign holdings may be attributed to countries that are major custodial centers.” A clear example of this is Britain, which was said to hold $347 billion in June 2011 in the old monthly series, only to see that plunge by more than $200 billion in the revised series.

On that third implication, China is the largest foreign holder of American securities. Numbers 2 through 12 include no less than eight countries for which there is evidence of indirect Chinese purchases of American assets. Examples are Britain, the Cayman Islands, and Hong Kong.

China’s direct holdings of all kinds of U.S. securities stood at $1.73 trillion in mid-2011, but its indirect holdings almost surely pushed that total past $2 trillion, perhaps well past. Treasury’s update yesterday was an improvement, but we still don’t know the true total or the true trend.

It’s not clear how much this actually matters. China can’t just stop holding dollar assets, and the U.S. has shown the unfortunate willingness to run up huge, extremely harmful deficits that are far beyond China’s capacity to finance no matter what Beijing does.

But in the second half of 2011, China’s balance of payments surplus — which funds its global investments — suddenly and strangely vanished after setting a record in the first half. This matters to the world economy: No new surplus means no new investment anywhere.

China will keep holding large amounts of Treasuries for the indefinite future. Even so, it would be helpful to know where Chinese money is going or not going. Treasury has recently taken steps to improve its reporting. It should continue to do so.

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