BBC News

China cuts holdings of US debt after ratings downgrade

image captionThere have been concerns that increasing debt levels in the US may hurt growth in the long term

China has reduced its holdings of US debt to their lowest level in a year, after the US's credit rating was downgraded by Standard & Poor's (S&P).

China sold $36.5bn (£23.2bn) in US Treasuries or bonds to cut its holding to $1,137bn in August, latest data by the US Treasury department showed.

In August, S&P cut the US's credit rating to double A+ from triple A over concerns about budget deficits.

China is the largest foreign buyer of US government debt.

Other countries in the region such as Hong Kong, Taiwan and Singapore also reduced their holdings of US Treasuries in August.

"These players are sitting on large dollar-denominated assets already, so they can afford to take a longer view," said Michael Woolfolk of BNY Mellon.

"They would have been the ones most concerned about a downgrade on their current holdings," he added.

'Safe-haven appeal'

However, the overall demand for US Treasuries increased in August amid rising global economic uncertainty.

The United Kingdom and Switzerland increased their holdings by almost $40bn each, while Japan increased its investment by $21.8bn to $936.8bn.

The have been concerns that the debt crisis in some European economies may hurt growth in the region.

At the same time there are fears that recovery in the US, the world's biggest economy, may be faltering.

Analysts said the combination of these factors reduced the appetite for risk among investors, who have turned to traditional safe havens.

"People were afraid of a Lehman-like crisis in August, so money was funnelled into Treasuries - notes and short-dated paper alike," said Mr Woolfolk.

Millan Mulraine of TD Securities said: "The flows reinforce the safe-haven appeal that Treasuries continue to enjoy, even if the turmoil was being driven in part by concerns about the quality of these assets".

Location factor

However, analysts said the figures may not give a complete picture of China's Treasury holdings.

They said that China buys some of its Treasuries through London and those figures do not show up immediately.

"It does not show up in the monthly figures but only in the final revised figures at the end of the year," Duncan Innes-ker of the Economist Intelligence Unit told the BBC.

This is because in its initial estimates, the Treasury department, attributes all purchases based on the country where they are made.

However, the revised data takes into account the origin of the buyers, as opposed to the location where the purchases were made.

Last year, the Treasury department revised up China's holdings by $268bn when it published its revised figures.

More on this story

  • US loses AAA credit rating after S&P downgrade