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China regains leverage on US as top debtholder

Freed by calmer yuan, Beijing resumes heavier purchases of Treasurys

BEIJING -- China has regained a bargaining chip with Washington by resuming the title of largest foreign holder of U.S. Treasurys, taking advantage of a calmer currency to buy more of the bonds amid relations strained by North Korea and a trade imbalance.

China increased its holdings of the debt by $44.3 billion in June to $1.14 trillion, while Japan shed $20.5 billion to stand second with $1.09 trillion, ceding a lead it had maintained since October, U.S. Treasury Department data showed Tuesday.

Since the 2000s, China has accumulated vast reserves of dollars earned through exports, and invested much of those stores in U.S. government bonds. The reserves also grew as Beijing sold yuan and bought greenbacks in an effort to keep its currency soft against the dollar. The country eclipsed Japan as the top overseas Treasury holder for the first time in September 2008.

But the yuan entered a free fall after the People's Bank of China devalued it in August 2015. The currency lost about 7% of its value over 2016 as concerns over the Chinese economy mounted.

The central bank was forced into reverse, selling huge quantities of greenbacks and buying yuan. Its foreign currency stash plummeted by $1 trillion in just two and a half years from a peak in June 2014, dropping below $3 trillion in January.

But the central bank's single-minded protection efforts have paid off, with the yuan on an upward trajectory and gaining steam this year. Intervention via dollar-selling and yuan-buying appears to have fallen greatly. Foreign currency reserves seem to have climbed throughout the six months through the end of July, and Beijing looks to have put the gains toward expanding its Treasury investments.

Beijing's return to the status of top American creditor reflects "that China and the U.S. have formed a pattern of deeply converging interests and mutual dependence," Foreign Ministry spokesperson Hua Chunying told reporters Wednesday. "We hope that the two sides can work together to uphold the mutually beneficial and win-win situation of China-U.S. economic and trade relations."

On Monday, U.S. President Donald Trump directed authorities to examine whether to launch a probe of Chinese trade practices, prompted by allegations of intellectual property theft by China. The move came amid frustration in Washington that Beijing has not taken the forceful step of cutting off oil supplies to North Korea, which continues to escalate its nuclear and missile development.

China has repeatedly urged the U.S. to keep trade issues separate from the Pyongyang problem. But serving as top Treasury holder may eventually provide leverage as Washington wades into the trade muck.

Beijing has played that card before.

The U.S. floated huge quantities of bonds following the 2008 financial crisis, and China bought many of them. In August 2011, when Standard & Poor's downgraded the U.S. credit rating, the state-run Xinhua News Agency growled that "China, the largest creditor of the world's sole superpower, has every right now to demand the United States to address its structural debt problems and ensure the safety of China's dollar assets." Xinhua suggested that Washington cut its military budget to help manage its debt problems.

Still, the expectation of additional U.S. interest rate hikes is strengthening the downward pressure on the yuan. The possibility lingers that the People's Bank of China will have to sell greenbacks and buy yuan once more, causing foreign currency reserves to dwindle. How long Beijing can hold the creditor crown remains to be seen.

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