SHANGHAI -- China's holdings of U.S. Treasurys dropped for a third consecutive month amid a yearlong trade war with Washington, in a trend that could see Japan once again become the top foreign holder of American government debt.
Beijing's holdings fell to a two-year low of $1.110 trillion at the end of May, down $2.8 billion from April, according to data from the U.S. Department of the Treasury. The latest balance is more than $90 billion below a high marked in August 2017.
Japan remained the second-biggest owner of Treasurys with $1.101 trillion in May, its highest level since August 2017 and up from $1.064 trillion in April. The increase was also Japan's largest in nearly six years.
Analysts say that while China uses its massive stockpile of U.S. debt as a tool in the trade war just like its currency, Beijing is reluctant to risk a major sell-off of its Treasury holdings because no other asset offers the same level of liquidity and safety.
Beijing's trade tensions with Washington escalated in May ahead of summit in Japan between U.S. President Donald Trump and Chinese leader Xi Jinping. Falling U.S. long-term interest rates that month provided a good opportunity for selling bonds, with prices moving in the opposite direction.
While trade talks have resumed, they have made little apparent progress so far. Trump said on Tuesday that additional tariffs on Chinese goods are ready to be deployed "if we want."
China's U.S. debt holdings, the world's biggest, have mirrored the trade tensions between the two economies. After bottoming out in early 2017, the balance rebound later that year but has since been seesawing on a general downtrend.
One reason China is shrinking its holdings may be that it is losing the financial capacity to buy more. The country has run a current-account surplus for four consecutive quarters starting in the April-June term of 2018, but many forecasters expect its current-account balance will begin to worsen soon.
Even as its Treasury holdings fall, China is ramping up purchases of gold. Beijing's reserves of the precious metal increased for seven straight months through June, according to the People's Bank of China.