For the last three years, China has been the financier that kept the
American government well funded. In 2004, it bought a fifth of the
Treasury securities issued, a proportion that rose to 30 percent in
2005 and to 36 percent in 2006.

But according to United States government figures, China reversed
course in 2007 and has become a net seller of Treasury securities. The
Treasury said this week that China had $388 billion in Treasuries at
the end of October, slightly less than it had at the end of 2006.

The sales, if the American estimates are correct, have come in a
year when the dollar has been weak against most currencies. The sales
would be consistent with China’s diversifying its investments into
other currencies.

But the figures may be misleading.

For one thing, other Treasury estimates show that the Chinese are
still increasing their holdings of bonds issued by quasi-government
agencies, like Freddie Mac and Fannie Mae, and by American companies.

Even including those purchases, however, the rate of increase of
Chinese holdings of dollar-based securities seems to have slowed.

The other problem is that the Treasury has a history of getting these numbers wrong, and then fixing them months later.

The initial estimates are based on reports of transactions in
securities; sales involving long-term securities, like Treasury bonds
and notes, reflect only the initial buyer.

So if China bought Treasuries through an intermediary in Britain or Hong Kong, the sale might be attributed to those areas.

Each June, the Treasury does a survey of actual holdings and revises
its previous estimates. The survey from June 2007 will be incorporated
in the February data.

A year earlier, the June 2006 figure was revised up by $62 billion, and a similar revision could come this year.

If so, that would reduce but not erase the trend toward China’s
owning fewer Treasuries. The country is running a huge trade surplus
that brings in billions of dollars each month, and its options are

It may need to buy dollar-denominated investments in significant
amounts to keep the Chinese currency from rising too far against the
dollar, but those investments do not have to be Treasuries.

This week China invested $5 billion in Morgan Stanley, an investment bank that needed to raise capital.

Over all, foreigners continue to finance the American government
deficit, with their Treasury holdings rising $194.7 billion in the
first 10 months of the year, more than the $166 billion increase in
Treasury securities held by the public.

Since January 2001, when President Bush took office, the debt issued
to the public has risen by $1.7 trillion, with $1.3 trillion of that
increase being taken by foreigners, the Treasury estimated.

Of that, the increase for China was $327 billion, about a fourth of the foreign total.

Via NY Times