China Still US's Largest Creditor, Probably

Flag of the People's Republic of China
Eriko Koga | The Image Bank | Getty Images
Flag of the People's Republic of China

Earlier this week the U.S. Treasury released its Preliminary Report on Foreign Holdings of U.S. Securities.

This report contains the preliminary revised annual numbers from the Department of Treasury.

As Cardiff Garcia at the Financial Times Alphaville explains, these revised annual reports are generally thought to be more accurate than the monthly Treasury International Capital System (TIC) data.

Garcia notes that the revised annual reports are "especially important" for assessing Chinese holdings, because the monthly TIC reports from Treasury are based on data garnered from interviews conducted with US financial institutions—and the Chinese tend "to buy a lot of its securities holdings through dealers in London."

That said, what do the new preliminary revised annual data show?

Well, first it appears that Mainland China is still the US federal government's largest creditor. The Chinese total U.S. Treasury security holdings, as of December 2010, remain above the $1.1 trillion level, down fractionally from November of 2010.

Garcia goes on to make several important points about what the data suggests.

First, there is a big variance between the monthly numbers and the revised annual TIC data:

"The revised figures show that China owned $1,160bn of Treasuries at the end of 2010, compared with a prior estimate of $892bn, published only two weeks ago."

And second, that reporting variability seems to have lead to a misunderstanding about U.S. Treasury holding on a relative basis—namely, who is the largest holder of U.S. Treasury securities and by what margin.

Reports had circulated last December that the US Federal Reserve had eclipsed China in its treasury security holdings.

I wrote about the story at the time, borrowing from the analysis of Tyler Durden at ZeroHedge.

As Garcia reports, "Even with the revised numbers, China still owns a little less US government debt than the Fed itself. The US central bank currently holds $1,205bn in Treasuries and is expected to own $1,600bn by the end of June when QE2 comes to an end."

But while the relative ranking in the league tables of U.S. Treasury debt remains the same, though the margins are tighter than was first believed, there is a significant divergence between the monthly and annual data.

The monthly October TIC Data reflected a Chinese holding of U.S. Treasury securities then listed at $906 billion. The new data reflect a Chinese holding during the same period of $1,175 billion—representing a total variability between the two reports of almost 30 percent.

So perhaps the short take away from this exercise in analysis is this: Be skeptical of monthly TIC data reports—especially of their accuracy regarding Chinese holdings of US Treasury securities.


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