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China's holding of US Treasury bonds has tumbled, according to US Treasury data released Tuesday, after Beijing expressed concern over the swelling US deficit and amid new US-China tensions.
The drop in China's bond holdings by 34.2 billion dollars or 4.3 percent to 755.4 billion dollars in December also fueled the biggest drop in foreign purchase of short-term US bonds, said the Treasury's latest international capital data report and based on comparative figures.
China's US bond holding decline was also its biggest drop since August 2000 and allowed Japan to regain its position as top holder of American government debt after a 15-month hiatus.
Japan's holding meanwhile increased to 768.8 billion dollars in December from 757.3 billion dollars the previous month, Treasury data showed.
China had grabbed the top position from Japan in September 2008 and gradually increased its US bond holdings until December last year.
The decline in the Chinese holding came amid deteriorating US-China relations in recent months with problems seen on multiple fronts, and after Beijing expressed concern about US economic woes.
China has consistently raised concerns about the mushrooming US debt, for fear it could erode the value of the dollar and its Treasury holdings as the American economy struggles to emerge from a brutal recession.
US Treasury Secretary Timothy Geithner traveled to Beijing in June last year to reassure Chinese leaders, saying their money is "very safe" despite the US budget deficit, which he pledged to cut.
But Chinese state media expressed opposition to Beijing's policy of buying massive amounts of US debt, saying the value of China's assets could be battered as a result of the global financial crisis.
As relations between Beijing and Washington worsen, some analysts said China might be cutting purchases of US Treasuries to flex its financial leverage but did not believe Beijing would dump its bond holdings into the market.
In the latest dispute, President Barack Obama's administration rebuffed Beijing's demand to cancel his meeting this week with the Dalai Lama.
The deepening public spat over Tibet, a row over US arms sales to Taiwan, China's dispute with Google and trade and currency disagreements, come at a key diplomatic moment, as Obama seeks Chinese help to toughen sanctions on Iran.
"While China may reduce its holdings of US debt in order to send a signal to Washington -- though this is not necessarily the only reason it would do so -- it has no intention of selling debt to the point that it wrecks the US economic recovery, since doing so would destroy China’s own economic and socio-political stability," analysts at US think tank Stratfor said in a note to clients.
China is highly dependent on US export markets and invests the bulk of its 2.2 trillion dollars in foreign exchange reserves in US Treasury bonds.
The United States receives a large volume of low-cost imports from China while Beijing's Treasury bond holdings virtually finance the snowballing US budget and current account deficits.
Despite growing at a more moderate pace in December, global private investors' demand for US domestic long-term securities remains solid, said IHS Global Insight US economist Gregory Daco.
"Confidence in the US recovery continues to boost foreign investors' appetite for US assets," he said.
