Surprise! China’s appetite for US debt revives

China’s appetite for US treasuries revived in May, after an unexplained fall in its holdings in April signalled concerns that the largest holder of US paper was diversifying away from dollar holdings.

According to US Treasury data, China’s holdings increased to $801.5 billion in May, against $763.5 billion in April. China bought a staggering $38 billion in US treasuries in May — against a net decrease of $4.5 billion in April. Of this increase in holdings, $4.03 billion was in long-term treasuries (against $10.3 billion in April); more significantly, China resumed buying short-term treasuries, of which it bought $34 billion — the largest purchase in six months.

“China’s appetite for US treasuries has clearly resumed,” Standard Chartered economists Jinny Yan and others wrote in a report. “We estimate that China’s holdings of all US securities — including agency and corporate bonds as well as equities — now stand at more than $1.6 trillion. The amount of buying, both in absolute and relative terms, still appears to be consistent with the recent trend.”

Analysts reckoned that this meant good news for the US dollar, which has been under pressure on speculation over China’s diversification strategy. According to IHS Global Insight chief US economist Brian Bethune, “We are not looking at any dramatic or unhealthy shifts that would be a source of concern for the US dollar.”

The US dollar’s role in the international monetary system is “irreplaceable in the short run,” Ding Zhijie, deputy director of the School of Banking and Finance at the University of International Business and Economics told Chinese news agency Xinhua. Given the volatility in global financial markets in May, there was “no better investment alternatives” for China, he reasoned.

Yan and others believe that, if anything, the latest US Treasury data underestimates China’s holdings — “partly because of purchases by China through London and other financial centres, which do not show up in the Treasury data.”

They believe that “we will see continued purchases in June, especially given the unrelenting growth in US debt issuance and the apparent revival of China’s foreign exchange reserve growth.”

Data released on Wednesday showed that China’s foreign exchange reserves jumped $178 billion - the biggest on record - in the second quarter of 2009 to touch $2.13 trillion, signalling the return of speculative hot money inflows that could feed ruinous asset price bubbles.