China Reduces US Debt Holdings After S&P Downgrade

By: EW News Desk Team   Date: 19 October 2011

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EW News Desk Team

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19 October 2011

China, the largest foreign holder of US Treasuries, cut their holdings by US$36.5 billion in August - The same month that saw Standard & Poor downgrade America's credit rating score. 

In a report by Chinese state-controlled news agency China Daily, China's 3.1 percent cut is also the first decrease in its holdings since a 0.8 percent decline in February. It was the biggest dollar sell-off by China this year, following net buying of more than $8 billion in July.

August was also the month when a lengthy debate in Congress on raising the US debt ceiling reached its deadline. The US hit its $14.3 trillion borrowing limit in May and set a deadline in August to raise the debt ceiling to avert a default.

Related: Debt Deal Ok’ed – US debt ceiling now $14.29 trillion

Related: EconomyWatch Exclusive: FOX Business expert on the US debt crisis

Right before the Aug 2 deadline, Washington reached a last-minute deal to raise the debt limit by more than $2 trillion, although the US' top-notch AAA credit rating was still knocked down a peg by ratings agency Standard and Poor's a few days later.

"But the move in China’s figure “is not a question of people disinvesting in the U.S. because there’s a negative macro outlook,” said James Caron in an interview with Businessweek, head of U.S. interest-rate strategy at Morgan Stanley in New York, one of 22 primary dealers that trade Treasuries with the Federal Reserve.

This is a lot more technical in nature that has to do with dollar strengthening and opportunistic selling, given how low yields went, Caron said.

Such a viewpoint seems to be true, given that overseas investors quadrupled purchases of U.S. Treasury debt in August. Foreign holdings of U.S. Treasuries have risen 3.1 percent this year through August, the smallest increase since 2006.

According to a Reuters report, most of the net $60.1 billion inflow into the bond market came from private investors seeking shelter from global market turmoil that began with fears that political fight over America's debt limit would lead to a U.S. default.

Related: Doomed for disaster – America’s dangerous debt deal: Michael Mandelbaum

Related: Afghanistan is broke, US drowning in debt – So what about a war ceiling? 


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