By Colin Barr
July 16, 2010

China trimmed its world-leading Treasury hoard in May, even as other foreign investors continued to buy U.S. assets.

China’s official holdings of U.S. government bonds slipped 4% in May to $868 billion, Treasury said in its monthly international capital report. That leaves China’s stash at its lowest level of the past year.

The pullback by China, the biggest overseas lender to the United States, comes at a time when central banks around the globe have been mulling a shift away from dollars.

The euro has recovered some ground against the dollar after a spring free fall, thanks to a slip in the market’s assessment of U.S. growth prospects. China, which has the world’s biggest pile of foreign exchange reserves, recently ordered a billion euros worth of Spanish bonds.

The Treasury holdings of all foreign official purchasers, such as central banks, dropped to $2.7 trillion in May from $2.72 trillion in April.

But Treasury purchases by overseas private investors more than made up for the slip in central bank demand. All told, foreigners bought a net $35 billion of long-term U.S. securities in May, and global Treasury holdings rose by $6 billion in the latest month.

Any reduction in China’s Treasury holdings will renew the perennial worry about China dumping U.S. assets and driving up interest rates here. But Michael Pettis, a finance scholar who teaches in China, says those who fret over that scenario are wasting their time.

The outcome Washington should be concerned about, he writes, “is its diametric opposite – a tsunami of capital flooding into the country,” at a time when policymakers everywhere should be trying to counter trade imbalances.

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