Foreign Holdings of US Treasury Securities are still growing at a rapid clip, but the percentage of foreign holdings of total holdings has slipped. On December 15, Treasury released this table (easier to read in link):
Total foreign holdings of US debt increased from $2.299 trillion in October 2007 to $3.043 trillion in October 2008. The top nation-state holders are China ($653 billion), Japan ($586 billion), the United Kingdom ($360 billion) and Brazil ($134 billion).
China's purchase of US debt has sparked debate there:
Wei Weixian, economist with the University of International Business and Economics, believes it "is a fairly acceptable option".
With US treasuries recently gaining investor favor, their yields have been on the decline; but in the long term, they are still a relatively safe investment for China, Wei said.
"Despite the financial crisis, the US economy remains the strongest, providing back-up for the treasury securities," he added.
He also pointed out that China does not have many options to deploy its massive amounts of foreign exchange reserves.
For example, China pulled $200 billion out of its foreign exchange reserves to set up China Investment Corporation (CIC) to diversify investment, but CIC has incurred heavy losses in its investment in the US private equity firm Blackstone due to the tumbling international financial markets. CIC has since said it would be more cautious in investment abroad.
China still wants to purchase short- term US debt because of its relative low risk in the current environment, and for a "lack of alternatives". But are there really a lack of alternatives for China? What about domestic investment and consumption? The US would actually like that because it would reduce our trade deficit with China.
Opponents of the rising purchases of US securities cite the possibility that Washington may be financially unable to pay back the money in the future, as it has to issue a lot more debt to finance its ailing financial markets.
As China piles up more US debt, it would also be a problem to sell it later as sales would affect returns on its existing dollar assets, analysts said.
The downside for them is the long term risk that the assets will lose value or that the US will default. Other foreign investors seem to share this concern:
US Treasury data show that net foreign purchases of long-term US securities in October decreased by $34.8 billion while foreign holdings of dollar-denominated US securities, including treasury bills and other custody liabilities, increased $92.4 billion.
This means global investors are seeking short term safety in US Treasuries but aren't necessarily bullish on the United States in the long term.
However, as a percentage of the total, foreign holdings have declined as a fraction of US debt:
The government's debt has increased quickly, and domestic investment opportunities have fled to safety, that even greater foreign holdings of our short- term debt mean that more government debt is now held domestically. In the long run, this could lead to higher interest rates on this debt. But it also may make us less vulnerable on our current account- to a sudden foreign pullout.
Comparisons to both the Great Depression and the currency crises that roiled developing countries in the 1990s are off base. Unlike the Great Depression, we are a large debtor and not a large creditor as we were in 1929, and total government and household debt is higher now than it was then. But despite our current account deficit, the US currently faces a homemade bubble, not a currency crisis.