China cuts U.S. Treasury holdings

NEW YORK (Reuters) - China fell behind Japan to become the second-biggest holder of U.S. Treasuries in a sign the Chinese have been acting on recent complaints about U.S. policy by unloading U.S. debt.

As one of the biggest creditors of the United States, China has complained over the past year about U.S. policies and worried publicly about the security of its dollar-denominated assets.

China was a net seller of all Treasuries to the tune of more than $34 billion, bringing its total holdings down to $755.4 billion from $789.6 billion in November, according to U.S. Treasury data released on Tuesday. China bought more than $4 billion in longer-dated Treasuries but was a net seller of Treasury bills.

Some analysts fear a waning appetite for U.S. debt could push up Treasury yields and weaken a fragile U.S. recovery.

"Net-net this data is only going to add to second guessing of Chinese behavior and raise concerns that they are not showing much enthusiasm for U.S. dollar-denominated paper," said Alan Ruskin, chief international strategist at RBS Securities in Greenwich, Connecticut.

Ties between China and the United States have been tested several times recently on issues including currency, trade, Internet censorship, human rights and U.S. arms sales to Taiwan.

Japan, by adding $11.5 billion, raised its total holdings to $768.8 billion, surpassing China for the first time since August 2008.

Ruskin said China has sold some $45 billion in Treasury debt over the past five months, calling it "a long enough period to hint strongly at a trend.

Still, the data showed the United States attracted overall net inflows of $60.9 billion. Treasuries of all maturities saw a net inflow of $69.9 billion, and net inflows into stocks rose to $20.1 billion from $9.6 billion in November. But U.S. corporate debt suffered a net outflow.

In addition to Japan, strong Treasury buying was also seen from Britain, Luxembourg and Hong Kong, the data showed.

Win Thin, a currency strategist at Brown Brothers Harriman in New York, called the data "a cause for modest concern that bears watching," but added, "we do not think the big global reserve managers are dumping U.S. dollar assets on a sustained basis."

He said euro assets are not an attractive alternative with markets worried that Greece may not be able to make the spending cuts necessary to get its swollen debt under control.

European Union ministers have offered Greece a pledge of support but stressed that Athens may need to commit to even more drastic spending and wage cuts.

SHIFTING INTO THE LONG END

Net inflows into long-term securities totaled $63.3 billion, down from November's $126.4 billion, the data showed.

Meanwhile, net outflows from Treasury bills hit a record $53 billion, with China leading much of the selling, Ruskin said.

But the shift into the long end of the curve may reflect more confidence in the U.S. economy as foreigners cut safe-haven purchases of bills.

Also, U.S. Treasury officials said earlier this month that they ended December "with an avalanche of cash," primarily from repayment of Troubled Asset Relief Program funds by banks such as Citigroup (C.N), Bank of America (BAC.N) and Wells Fargo & Co. (WFC.N).

Much of this was used to pay down Treasury bills as the government tried to stay under the debt limit and shifted more of its borrowing to longer-dated coupons.

(Additional reporting by David Lawder in Washington; Editing by Chizu Nomiyama)