China expected to lose top U.S. creditor crown to Japan as yuan struggles

Chinese 100 yuan banknotes and a Japanese 1,000 yen banknote are seen in this picture illustration in Beijing, China

From Reuters:

“China will soon be dethroned by Japan as the top holder of U.S. government debt as the Chinese central bank has been dipping into its foreign exchange reserves to support the yuan, while its Japanese counterpart has been content to allow the yen to weaken, economists said.

Investors are paying close attention to declines in China’s holding of U.S. Treasuries as any sharp sell-off could add further upward pressure to U.S. interest rates, which in turn can undermine the Chinese currency. The figures for foreign ownership of U.S. Treasuries in October are due out on Thursday afternoon in Washington.

On Wednesday, the U.S. Federal Reserve raised interest rates and signaled a faster pace of rate increases in 2017, sending yields on shorter-dated Treasuries to their highest levels in more than five years.

U.S. President-elect Donald Trump’s attacks on Beijing over its trade and currency policies, as well as his questioning of the stance of current and past U.S. administrations concerning Taiwan, has triggered fears that China could decide to sell U.S. Treasuries in response.

However, Chinese government policy advisers, who declined to be identified because of the sensitivity of the subject, say they believe that’s highly unlikely.”

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