China Cuts U.S. Debt Holdings

The Chinese government reduced its holdings of U.S. Treasury bonds to its lowest level on the year by $14.2 billion in October.

Analysts said the decline is mostly due to a stronger dollar, meaning the Chinese government has to spend more renmimbi (RMB) to acquire the same amount of bonds it purchased a month prior, when their currency was stronger.  Moreover, media reports cited declining positions of Chinese banks for foreign exchange purchases, an indicator of capital outflows.

The RMB has been selling off lately as local Chinese see a grim forecast for the global economy. Their local economy, meanwhile, is also slowing in response.

�The low level of China�s holding of U.S. debt indicates the huge pressure of capital outflow that the country has been faced with,� Lu Zhengwei, chief economist with Industrial Bank Co Ltd was quoted saying in China Daily on Saturday.

�The central bank is increasing its holdings of dollars in cash, preparing to sell them in the market if necessary to offset the impact of liquidity outflows,� he said.

China held a total of $1.13 trillion of U.S. Treasury debt as of October 2011, roughly accounting for 24% of total foreign holdings of U.S. debt, according to the Treasury Department. China is the largest foreign holder of U.S. Treasurys.