Treasury Secretary Timothy Geithner warned lawmakers last week that even a short-term default would have "catastrophic economic consequences."
China's holdings of Treasury debt dropped 1.2 percent to $895.6 billion, the Treasury Department said Tuesday. The report comes just before a state visit to the U.S. by Chinese President Hu Jintao.
Overall, foreign holdings of Treasury securities rose 0.9 percent to $4.35 trillion. That indicates that other nations still have an appetite for Treasury debt even as the U.S. government is running $1 trillion-plus annual budget deficits.
Of the total foreign holdings, $2.82 trillion or about two-thirds, is held by foreign governments and central banks.
Foreign demand for U.S. Treasury debt has been critical in helping to keep interest rates low. If the United States had to finance all of its debt domestically, it would drive up U.S. interest rates not only for the federal government but also for American companies and consumers.
That would slow U.S. growth at a time when the Federal Reserve is trying to keep interest rates low to help boost the economy.
Foreigners seek U.S. Treasury securities because they are viewed as the world's safest investment. The U.S. government has never missed a debt payment. However, that could change in the next few months.
The U.S. will hit its federal debt ceiling of $14.3 trillion this spring. Republicans, who control the U.S. House, are vowing to oppose increasing the debt ceiling unless it is accompanied by significant cuts in government spending.
Treasury Secretary Timothy Geithner warned lawmakers last week that even a short-term default would have "catastrophic economic consequences." The fear is that interest rates could rise and remain high for decades.
The Treasury report Tuesday said that Japan, the second-largest holder of Treasury debt, expanded its holdings to $877.2 billion in November, an increase of 0.3 percent.
Britain, ranked third, saw its holdings surge 7 percent to $511.8 billion. Oil exporting nations trimmed their holdings for a second straight month, decreasing them by 1.6 percent in November to $210.4 billion.