China in record US debt sell-off Wednesday, February 17, 2010 17:09 Mecca time, 14:09 GMT
The Chinese sell-off means Japan is now the top holder of US Treasury bonds [EPA]
China sold a record amount of its US Treasury holdings in December, ceding its place as the world's biggest foreign holder of US debt to Japan.
According to Treasury figures released on Tuesday, Beijing sold off more than $34bn of its holdings in the final month of 2009, cutting its holding of US debt by just over 4 per cent to $755.4bn.
Japan now holds almost $11bn more US debt than China, with a total of nearly $769bn.
Japan had been the largest holder of US Treasury bonds until September 2008, when it was overtaken by China.
'Subtle message'
The Chinese sell-off of US bonds follows increasingly vocal concern from Beijing over the ballooning US deficit, and comes amid a deterioration in relations between the US and China on a range of fronts.
Eswar Prasad, a trade policy professor at Cornell University in New York state, said the Chinese sales of US Treasuries could contain "a subtle economic and political message" aimed at Washington.
"Chinese leaders are deploying their reserves to try and pressure the US to stop haranguing China about its currency and trade policies and to back off from interference in its domestic political and human rights issues," he told the AFP news agency.
In the latest spat between Beijing and Washington the White House has rejected a Chinese demand that Barack Obama, the US president, cancel his meeting this week with the Dalai Lama, the exiled Tibetan spiritual leader.
Complicating issues still further the rows over Tibet, a US arms sales to Taiwan, China's dispute with Google and a raft of others trade and currency disagreements, come at a time when Obama is seeking China's help to toughen sanctions on Iran.
Chinese dependence
However, US think-tank Stratfor in a note to clients on Tuesday said that while the debt sell-off may have political undertones, China remains fully aware of its own dependence on the US.
"While China may reduce its holdings of US debt in order to send a signal to Washington - though this is not necessarily the only reason it would do so - it has no intention of selling debt to the point that it wrecks the US economic recovery, since doing so would destroy China's own economic and socio-political stability," it said.
Analysts have speculated about political motives behind China's move [GALLO/GETTY]
China invests the bulk of its $2.2trn in foreign exchange reserves in US Treasury bonds which has virtually financed the snowballing US budget and current account deficits.
At the same time, despite recent increases in China's domestic consumption, its economy and millions of Chinese factory jobs remain highly dependent on US export markets.
Nonetheless, in recent months Chinese officials have repeatedly voiced concern about the mushrooming US debt, fearing it could erode the value of the dollar and its Treasury holding.
Last June Timothy Geithner, the US Treasury Secretary, travelled to Beijing to reassure Chinese leaders, saying their money is "very safe" and pledging to cut the deficit.
Tensions have been rising over the past month on the Korean peninsula since the sinking of South Korean naval vessel, the Cheonan. An international investigation concluded that the coastal patrol warship was sunk by a North Korean torpedo. The two Koreas have since responded by cutting most trade and communications links, raising fears the peninsula could be headed towards a return to the devastating warfare of the early 1950's.
[VIDEO inside]
At a rally organized in the capital by a South Korean patriots' group, participants vented their anger at the North - and specifically, leader Kim Jong Il.
Thousands of mostly elderly spectators - many of them survivors of the civil war here in the early 1950's - watched as young martial arts experts kicked apart wooden planks - some of them spelling out "North Korea - retaliation."
The speakers on the platform took a harder line than that of their government, calling for revenge for the sinking of the South Korean ship.
It was a message warmly greeted by those in the audience.
"We have to be stronger," said an elderly woman in uniform. "The measures taken by our government are too soft. We have to kill all the North Korean aggressors. That is why I attended today's rally."
But many professionals, are cautious about harsher measures or an outbreak of hostilities that would shake investor confidence in South Korea, one of the world's top 15 economies.
"Assuming that North Korea is responsible for the Cheonan incident, then it is appropriate for the government to respond at the level it has," said a young man.
"I fully support the decisions the South Korean government has made," said another man. "We should use all possible sanctions and keep looking for ways to get North Korea to change through international collaboration. But there should not be war."
One thing nearly all South Koreans agree on is the devastating human toll that all-out war would take on the peninsula, recalling - from direct experience or their education - that one and a half million civilians died during the three-year Korean War.
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