Foreign Affairs

China’s Grip On US Debt Weakens As Its Currency Crumbles

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China is no longer the biggest foreign owner of U.S. debt.

China is selling off its debt holdings to prop up its weakening currency, which recently dropped in value to an eight-year low, reports CNN Money.

Japan overtook China as America’s biggest foreign creditor as the latter’s massive collection of U.S. Treasuries shrunk to its smallest size in six years, Bloomberg introduced.

As of the end of October, China held $1.12 trillion in U.S. government bonds, bills, and notes, down $41.3 billion from the previous month. Japan held $1.13 trillion, down only $4.5 billion, according to a report released by the U.S. Department of the Treasury.

China has been the largest foreign holder of U.S. debt since 2008, with the exception of February last year, when Japan briefly overtook China as the largest overseas creditor.

Together, Japan and China account for 37 percent of overseas U.S. debt holdings. While Japan is America’s largest overseas creditor, it is not the largest owner of American debt overall, a title still held by the U.S. Federal Reserve.

The value of China’s currency has been steadily declining since last year. Two major devaluations occurred in August, 2015, and January, 2016, and now the value of the Chinese yuan is once again dropping rapidly.

“The most pressing demand of the day is to break the renminbi’s one-way depreciation expectations,” Sheng Songcheng, a senior adviser at the People’s Bank of China, told the Wall Street Journal.

Following the surge in the U.S. dollar after the election of Donald Trump, the value of the yuan dropped again. China has also been combating capital flight, which has only been further contributing to the devaluation of China’s currency. The U.S. Federal Reserve’s decision to raise interest rates has put additional pressure on China’s currency.

China is also struggling with a slower economy.

Beijing purchased U.S. Treasuries to keep its currency weak as it worked to grow its economy, but now it is selling off its foreign reserves to purchase yuan to prevent another severe drop in value.

A sharp sell-off could potentially lead to higher U.S. interest rates though, further undermining China’s yuan.

Reports on China’s holdings of U.S. debt for November will provide a clearer picture of how recent economic shifts since the election have impacted the debt situation.

China’s foreign currency holdings sank to the lowest level in five years last month. The country’s foreign reserves fell for the fifth straight month to $3.05 trillion, down from $4 trillion in June 2015.

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