Beijing appears to be slowly adding to its holdings of US Treasuries despite the looming risk of a US debt default, with solid inflows of foreign capital into China's tightly managed capital account pushing up its foreign reserves, the world's largest. That's despite the state media's recent vehemence about Washington's failure to meet its responsibilities as a leading power. China raised its holdings of US government bonds in five of the first seven months of this year, trimming them only in January and June, according to the US Treasury. Beijing's held Treasury bills worth US$1.2773 trillion at the end of July, US$56.9 billion higher than at the end of last year. More recent data on China's Treasury holdings is not available. But foreign exchange reserves grew by US$163 billion in the third quarter, the biggest quarterly increase since the second quarter of 2011. This suggests its Treasury holdings have also increased further. The data indicates the State Administration of Foreign Exchange (SAFE) has held its holdings stable. US politicians have yet to reach an agreement over how to end a budgetary impasse in the face of tomorrow's deadline to lift the debt ceiling. Zhang Ming , deputy director of the international finance research office at the Chinese Academy of Social Sciences, said he had not seen any clear sign that Beijing was trimming its US holdings, adding that there was no need for it to do so. "The likelihood of the US government running into default is very small," he said. "They are set to reach a temporary agreement, such as delaying the debt ceiling issue for another four or six months, which might trigger only small market volatility, rather than causing any big systemic risks. "In the medium term, the Federal Reserve is expected to tighten its monetary policy and the dollar is set to strengthen. Under these circumstances, reducing dollar holdings wouldn't be a very smart practice." SAFE, the operating arm of the People's Bank of China, has never published details of the composition of its foreign-exchange reserves. Zhang estimated that Beijing's total holdings of US Treasuries, including those held by institutions in London or Hong Kong, may have reached US$1.6 trillion. That would be about 44 per cent of China's foreign exchange reserves, which rose to US$3.66 trillion at the end last month. State media have become more critical of Washington as the debt ceiling debate has dragged on. "The cyclical stagnation in Washington for a viable bipartisan solution … has again left many nations' tremendous dollar assets in jeopardy and the international community highly agonised," a Xinhua commentary on Sunday said.
