China tops Japan as No. 1 holder of U.S. Treasury debt

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Like nearly everyone else, the Chinese wanted the security of holding short-term U.S. Treasury bills in September as markets worldwide crumbled.

With China’s purchases of T-bills that month, the country surpassed Japan to become the No. 1 owner of U.S. Treasury debt, according to government data reported today on foreign investment in U.S. securities.

The September numbers overall confirm that foreigners still regard the U.S. as the best haven in times of international financial crisis.

Net foreign purchases of long-term U.S. securities, including stocks and bonds, totaled $66.2 billion in September, up from $21 billion in August and $18.4 billion in July, Treasury data show.

As the global credit crisis worsened, slamming stocks, commodities and other markets, many investors put safety of principal above all other considerations. That pushed them into short-term U.S. Treasuries.

China increased its Treasury investments by $43.6 billion in September, lifting the total to $585 billion and taking the No. 1 spot among all foreign holders.

Japan, by contrast, reduced its Treasury holdings by $12.8 billion, to $573.2 billion.

China’s Treasury purchases in September were focused on T-bills, such as three- and six-month issues. The Chinese boosted their T-bill holdings by $39.4 billion in the month.

Any capital inflow to the U.S. helps us finance our budget deficit, but the Treasury’s great need in the next year will be to line up buyers -- including foreigners -- for longer-term notes and bonds.

The U.S. may have to issue as much as $2 trillion in debt over the next four quarters to pay for the financial-system bailout, the war efforts in Iraq and Afghanistan and economic stimulus programs, as I noted in my weekend column in The Times, here.

The problem with huge cash inflows into short-term Treasury issues is that the money could flow out as easily as it flowed in, as T-bills mature in the next year, notes George Goncalves, Treasury strategist at Morgan Stanley in New York.

For a list of the largest foreign owners of U.S. Treasury debt, go here.