Is China losing its appetite for being the United States’ biggest creditor? Don’t bet on it just yet.
On Thursday, new Treasury data showed that China pared its holdings of U.S. Treasury securities by 1.3 percent February, the fourth monthly decline in a row. China’s Treasury holdings dropped $11.5 billion to $877 billion in February and are down more than $60 billion from last October.
The new data further fueled questions whether Chinese policymakers are signaling a broader reluctance to buy up U.S. debt, a shift that could reduce demand for U.S. securities and consequently drive up interest rates.
But analysts say it is a mistake to draw too much meaning from the monthly data. For one thing, China’s appetite for Treasury debt is driven primarily by its policy of preventing an increase in the value of its currency, the renminbi. Despite recent hints that China will let its currency rise against the dollar, that policy has yet to be implemented.
More importantly, the data indicates that global investor appetite in U.S. securities held steady. Since last October, Treasury holdings in Britain surged as much as those in China declined. And because London serves as a trading center for institutions from around the world, the surge in its holdings may include some Chinese purchases.
Regardless, China remains the biggest U.S. creditor by a healthy margin according to February data, the last month for which data is available. Japan came in second, with its Treasury holdings drifting down 0.4 percent to $768 billion.
China’s appetite for U.S. debt remains anchored to its currency policy, and that policy continues to prevent the Chinese renminbi from appreciating against the dollar and forcing up the cost of their exported goods.
Indeed, China and the United States are locked into opposite sides of a dilemma. American experts have complained for years that the Chinese renminbi is deeply undervalued, which they say gives Chinese exports an added price advantage and aggravates the United States’ huge trade deficit.
But China’s exchange rate policies have also been the main reason for its huge purchases of U.S. Treasuries. To keep the renminbi from appreciating, China buys up Treasuries and other dollar-denominated securities, which has the effect of propping up the value of the dollar in relation to the renminbi.
Under pressure from the United States, Chinese leaders hinted earlier this month that they would slightly relax their policies and allow for daily fluctuations in their currency, rather than tightly pegging it to the dollar. But Chinese officials have also reiterated that they will not be pushed into big changes, and analysts predict that the renminbi will at most climb slightly in value sometime later this year.
Chinese authorities relaxed their long-time peg to the dollar in 2005, letting the dollar’s value fall from 8.2 renminbi that year to 6.8 renminbi in 2008. But that relaxation halted when the financial crisis began, and it has yet to resume.
“There’s probably going to be a somewhat modest appreciation later this year, but any sort of vicious, uncontrolled appreciation is very unlikely,” said Michael Darda, an analyst at MKM Partners, a securities trading firm in Greenwich, CT.
Analysts also caution that the Treasury’s monthly report on international capital flows is already dated and provides at most a blurry picture of international capital flows.
Despite high federal deficits and the flood of new U.S. debt, as well as warnings from credit rating agencies that the United States’ AAA rating could be at risk in the future, global investor appetite for long-term Treasuries remains healthy for the moment.
Though interest rates on 10-year Treasury bonds have climbed from their low point at the worst of the financial crisis, they have been holding steady for months now at about 3.9 percent—still very low by historical standards.