China just ramped up its holdings of US treasuries

Fears of a tit-for-tat trade war have subsided. (Photo by Sean M. Haffey/Getty Images)

China was buying US treasuries at the fastest rate in six months just prior to the recent trade spat between the two countries.

Bloomberg reports that China’s holdings of US government debt rose by $US8.5 billion in February to a total of $US1.18 trillion. The increase means China retained its position as the largest foreign creditor to the US.

Prior the recent increase, China had been trimming its US Treasury holdings in the second half of last year after they climbed above $US1.20 trillion in August.

Data from the US Treasury department shows Japan ranks second, after its holdings fell to $US1.06 trillion in February, down from $US1.07 trillion.

It suggests that even though trade tensions between the two countries flared in late March, US government debt still represents an attractive asset class for Chinese capital flows.

Earlier this month, analysts speculated that China could use its huge stockpile of US treasuries as a bargaining chip in trade negotiations.

A large sell-down by Chinese authorities could spark a rise in US bond yields, in turn putting pressure on US government finances.

But bond investor Jeff Gundlach from DoubleLine Capital said China’s vast debt holdings can only be used as leverage if they don’t sell.

“It is more effective as a threat. If they sell, they have no threat,” Gundlach said earlier this month.

“It would only escalate the situation and eliminate their leverage.”

For now, the threat of a full-blown trade war appears to have subsided after Chinese President Xi Jinping adopted a conciliatory tone in a speech at the start of last week.

Whether China responded to the trade spat by adjusting its Treasury holdings in March remains to be seen, although demand for US bonds has strengthened in recent weeks as global markets adopted a more cautious stance.

In the meantime, US President Trump has turned his attention to currency markets, accusing China and Russia of “playing the Currency Devaluation game“.

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