Pedestrians walk through in this photograph taken with a tilt-shift lens in China. (Photographer: SeongJoon Cho/Bloomberg)

China's Holdings of U.S. Treasuries Rise to Five-Month High

(Bloomberg) -- China’s holdings of Treasuries rose to a five-month high in March, underscoring the allure of U.S. government debt even amid trade tensions between the world’s two largest economies.

China’s holdings of U.S. bonds, bills and notes increased by $11 billion to $1.19 trillion in March, according to Treasury Department data released in Washington on Tuesday. China remained the largest foreign creditor to the U.S., followed by Japan, whose holdings dropped by $16 billion to $1.04 trillion, the lowest level since October 2011.

China's Holdings of U.S. Treasuries Rise to Five-Month High

The month of March marked a rapid escalation in trade tensions as the Trump administration slapped new tariffs on imported steel and aluminum -- mainly aimed at reining in China’s excess industrial capacity. The White House also announced plans to impose duties on billions of dollars of goods from China, which then vowed to retaliate.

Speculation is growing about whether China could use its vast Treasury holdings as a bargaining chip in a trade dispute with the U.S. A Chinese delegation is in Washington this week to try to work out the differences, which U.S. Commerce Secretary Wilbur Ross on Monday described as “wide.” The negotiations are easing worries over a trade war.

China’s stockpile of foreign-exchange reserves rose by $8 billion in March, after declining in February for the first time in more than a year amid volatility in the global financial markets. The yuan has gained about 8 percent over the past year as stricter capital controls have kept money from flowing out.

Foreign demand for U.S. debt is a critical issue as the U.S. government ramps up borrowing to cover a widening budget gap. The fiscal deficit is forecast to surpass $1 trillion by 2020 amid tax cuts and increased spending under President Donald Trump, adding pressure on a debt burden that was already swelling under President Barack Obama.

The U.S. is boosting the amount of long-term debt it sells to $73 billion this quarter, after setting a first-quarter record by borrowing a net $488 billion.

“The U.S. Treasury market is the most robust and liquid in the world,” Treasury Secretary Steven Mnuchin said in an interview on Bloomberg TV earlier this month. “There is a lot of supply but I think the market can easily handle it.”

©2018 Bloomberg L.P.