Japan May Not Be Biggest U.S. Creditor, Stone & McCarthy Says

By Daniel Kruger

Feb. 18 (Bloomberg) -- The Treasury’s methodology for calculating the holdings of overseas investors leaves room to question whether Japan has overtaken China as the biggest lender to the U.S., according to Stone & McCarthy Research Associates.

Japan became the biggest holder of U.S. government securities in December for the first time since September 2008, overtaking China which had held the largest position of the debt, Treasury data released Feb. 16 show.

The Treasury has underestimated changes in the holdings of both China and Japan for 2006, 2007 and 2008, raising the question of whether the data reflects a shift in support for U.S. government debt as the Obama administration raises record sums amid the biggest budget deficits in the country’s history, Nancy Vanden Houten, a Skillman, New Jersey-based analyst at Stone & McCarthy, wrote in a note to clients on Feb. 16.

“The further we get away from the June survey date, the rougher the proxy for actual Treasury’s monthly estimates become,” Vanden Houten wrote. “Japan may in fact have held more Treasury securities than China at the end of 2009. But it’s impossible to make that claim with a high degree of confidence.”

The Treasury data on note and bond positions uses holdings recorded in an annual June survey which are adjusted by adding monthly trading information. To be included by the Treasury, one counterparty must be in the U.S., with ownership attributed to the nation where the other counterparty is located, Vanden Houten wrote.

Underestimated Purchases

Using that data, the Treasury underestimated China’s accumulation of Treasuries by 104 percent in 2006, 237 percent in 2007 and 130 percent in 2008, Vander Houten wrote. The data also underestimated the decline in Japan’s holdings by 132 percent in 2006, she said. It undercounted the rise in the country’s Treasury position by 127 percent in 2007 and showed a decline in the holdings for 2008 that was more than twice the size of the increase in the purchase of the securities, she wrote.

Japan’s holdings rose 1.5 percent in December to $768.8 billion while China’s dropped 4.3 percent to $755.4 billion, the latest Treasury data showed. China allowed its short-term Treasury bills to mature and replaced them with a smaller amount of longer-term notes and bonds, according to the data. For all of 2009, Japan raised its ownership by 23 percent while China’s increased by 3.8 percent.

China, with the world’s largest central bank reserves, may be moving money to other investments from the relative safety of Treasuries as the U.S. runs record budget deficits, economists said. China’s Treasury holdings peaked at $801.5 billion in May, and net sales in November and December were the first consecutive months of reductions since late 2007.

Budget Gap

China had been the largest creditor abroad to the U.S. since September 2008, when its holdings of Treasuries surpassed those of Japan. China’s holdings of Treasury bills have shrunk to $69.7 billion, about a third of the $210.4 billion held in May, as the outlook for a recovery in the U.S. remained unclear.

Chinese officials have over the past year expressed concern about an increase in U.S. debt to fund the swelling fiscal deficit. Premier Wen Jiabao said in March 2009 he was “worried” about China’s Treasury holdings and wanted assurances that the nation’s U.S. investments were safe, and central bank Governor Zhou Xiaochuan has proposed a new global currency to reduce reliance on the dollar.

Treasury Secretary Timothy Geithner has sought to assure China that the U.S. will close the budget gap and boost national savings over time.

Dalai Lama

Tension between the U.S. and China has risen in the past few months over censorship of Google Inc., climate change and arms sales to Taiwan. President Barack Obama met the Dalai Lama, the exiled Tibetan spiritual leader, in Washington today even after China called on the U.S. to cancel the gathering. Tibet has been under Chinese control since 1950.

Total foreign holdings of Treasuries rose 17 percent in 2009 to $3.61 trillion as outstanding Treasury debt increased 25 percent to $7.27 trillion, according to Treasury data. Half of U.S. debt is held by foreign investors, down from a peak of 55.7 percent in April 2008.

To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net;