Is China reducing its US debt holdings?

The NY Times today says, yes.

China has bought more than $1 trillion of American debt, but as the global downturn has intensified, Beijing is starting to keep more of its money at home, a move that could have painful effects for American borrowers.

. . .

China’s voracious demand for American bonds has helped keep interest rates low for borrowers ranging from the federal government to home buyers. Reduced Chinese enthusiasm for buying American bonds will reduce this dampening effect.

Brad Setser says, not so fast.

In some sense China’s purchases of US debt has to fall from its current level, as the current level of purchases is unsustainable in a context where China’s reserve growth seems to have slowed. The TIC data show a $44.4b increase in China’s US holdings in September and a $67.5b increase in October, with nearly all the increase coming from the rise in China’s short-term Treasury holdings.

That said, the available data from US suggests that China has yet to lose its appetite for either dollars or Treasuries, despite all the talk coming out of China.

We don’t have data for November or December, so the US data are by now a bit stale. But China’s $67.9b of purchases of Treasuries in October were exceptionally high ($43.5b in September isn’t shabby either). That level of Treasury purchases suggests, if anything, that China was shifting funds into dollars, as China’s recorded US purchases almost certainly exceeded China’s October reserve growth. I suspect that China wasn’t shifting into the dollar so much as holding more dollars in ways that register in the US data, so I would discount this data point a bit. But the raw October data certainly doesn’t indicate any shift away from either the dollar or Treasuries. Rather the opposite.

I find it hard to believe that China is not in the slow process of reducing its US debt holdings. One of the significant consequences of our 2008 Wall-Street collapse is that US debt is no longer worth what it used to be.

So get ready: Without China's financing of our debt, America will have to raise its own revenues (interest rates, taxes), cut spending, and engage in real inflation-battling for the first time in decades. It seems likely to me that, slowly and steadily, this is our coming reality.