New data on international capital flows into U.S. financial assets were released Monday indicating that in June China was a net seller of $25.1 billion of U.S. Treasuries. Many will put the sale in the context of China’s $38 billion buying splurge in May, but the better metric is put the net purchases for May and June in the context of its $122 billion accumulation of international reserves during the two months. In other words, China invested very little of its new money in Treasuries in May and June—just over 10%, a sharp contrast to the 60% to 70% figures seen in recent years.
China’s investment in Treasuries in recent months looks even smaller when data for April are included. In April, China accumulated over $55 billion of international reserves, yet it was a net seller of $4.4 billion of Treasuries. While the maturation of T-bills could explain some of what happened (foreign holdings of Treasury bills increased sharply beginning last summer, from about $225 billion to a peak of $586 billion in May, and China was in fact a net accumulator of about $40 billion of long-term Treasuries in April through June--a healthy clip, implying it sold or let mature some of its T-bill holdings), the net figures will get a good deal of attention. Moreover, foreign holdings of bills on the aggregate fell only $14.5 billion in June.
In total, China accumulated $177 billion of reserves from April through June, yet its net purchases of Treasuries were just $9 billion. In 2008, China’s reserves increased $418 billion and its net Treasury purchases were $250 billion, about 60% of the reserve accumulation. The recent pattern suggests China hastened its effort to diversify its international reserves, which totaled $2.132 trillion at the end of June. China, which has spoken openly about its diversification imperative, has put its money where its mouth is.
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