China Fires Warning Shot

February 19, 2010 at 08:38 (Economy, News)

Now that we let them buy us, they are starting to let us know that they know that they own us.

If there is one thing that gets investors twitchy, it is the fear that China is losing its appetite for US government bonds.

securities thumbAs the biggest and most liquid pool of assets in the world, the US Treasury market lies at the heart of the global financial system and allows the American government to finance its trillion-dollar budget deficits. Until recently, China has been the largest foreign official holder of US debt.

That is why the latest release of Treasury International Capital (Tic) data, showing that China’s holdings of Treasuries fell by a record amount in December, has caused something of a stir.

China’s holdings fell by $34.2bn to $755.4bn from the previous month, prompting renewed jitters that the country was diversifying from Treasuries over fears about their future value.

China’s holdings have fallen from a peak of $801.5bn in May 2009, and the data come at a time of heightened political friction between Beijing and Washington over issues such as Barack Obama’s meeting with the Dalai Lama, US weapons sales to Taiwan, and pressure on China to revalue the renminbi.

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