China Is Reducing U.S. Treasuries Holdings
The writing was on the wall for anyone who cared to look. China had been making various noises stomping their feet on the ground to show their unhappiness with U.S. economic affairs. Now it is final: they are reducing holdings of U.S. Treasuries.
Indeed, over all foreign demand for U.S. Treasury securities have fallen by the record amount of $53 billion in December 2009. China's reduction alone amounted to $34.2 billion.
What that means is the U.S. government may be forced to raise the interest rate in the near future, thereby increasing interest payments to foreign countries during a time of huge federal deficits.
China has been the largest buyer of US bonds in recent past. They were investing dollars that they earned from trading with the US back into US Treasuries and other dollar-denominated assets.
Although Japan increased its holdings of U.S. Treasuries by $11.5 billion in December, this was a drop in the bucket in view of the large reduction by the Chinese. The Chinese government keeps their currency artificially low against the dollar so that Chinese exporters get a boost and the demand for American products is kept low at home.
To complicate the scenario the dollar has surged against all major currencies and also precious metals. The dollar is at a nine-month high against the euro. The only silver lining came from Goldman Sachs' chief economist's comment that the Chinese are about to revalue their currency by moving as much as 5% upward against dollar to cool their overheated economy.