Global Policy Forum

By Min Zeng *

Foreigners withdrew funds from U.S. assets in record amounts in January, but China continued to add to its stockpile of U.S. government debt.

Already the largest foreign creditor to the U.S. government, China raised its Treasury holdings another $12.2 billion in January, taking its total holdings to $739.6 billion, according to the latest data from the Treasury Department released Monday. China held $492 billion in Treasurys in January 2008. Foreigners sold a net $60.9 billion in long-dated U.S. securities in January, after buying $24.3 billion in December. Including changes in banks' dollar holdings, short-term securities and nonmarket transactions, net foreign capital outflows totaled a record $148.9 billion in January, compared with $86.2 billion in inflows in the previous month.

Michael Woolfolk, senior currency strategist at the Bank of New York Mellon Corp., said the big outflows are a concern and could represent a trend away from the flight to quality that has boosted purchases in U.S. assets in recent months. "This was a truly awful report, throwing into question the funding of the U.S. current-account deficit," he said in a statement.

China's pace of buying has slowed in recent months. In October, at the peak of the credit crisis, China added $65.9 billion to its Treasury holdings, while in December, its holdings increased $14.2 billion. Weakening economic growth in China, mainly due to a plunge in exports, is reducing the amount of foreign reserves it has to recycle into dollar-denominated assets. "We have already seen the peak in terms of the pace of accumulation," said Kathy Lien, director of currency research at Global Forex Trading in New York. "But I don't think China will turn into a net seller anytime within the next six to eight months."

Dumping Treasurys would hurt both the U.S. and China. Were China to sell a substantial amount of Treasurys, bond yields would jump, while Treasury prices and the value of the U.S. dollar would plunge. Last week, Chinese Premier Wen Jiabao expressed concern about the safety of U.S. government debt, but he didn't signal any moves by China to unload Treasury holdings. Ms. Lien said Mr. Wen's comments on Friday signal that China is "flexing its political muscle" ahead of the release of the Treasury's semiannual currency report next month.

Treasury Secretary Timothy Geithner, in his congressional confirmation hearings this year, caused a stir when he said China is manipulating its currency, the yuan.

About the Author: Tom Barkley also contributed to this article.