China buys less U.S. debt as reserve growth slows

— -- China bought more than $4.6 billion worth of U.S. Treasury securities in February, despite fears that the United States' top foreign lender may be growing nervous about its massive holdings of U.S. government debt.

"I don't think there's any real evidence of a turn away from U.S. securities, certainly no evidence of a turn away from Treasuries," says Brad Setser, a former Treasury Department economist now with the Council on Foreign Relations.

China is buying fewer U.S. government securities than in earlier years and has shifted away from long-term bonds and securities issued by troubled mortgage giants Fannie Mae and Freddie Mac. But analysts said the reduced overall purchases are because China's foreign exchange reserves are growing more slowly. The past six months, China's reserves grew by a monthly average of $8 billion vs. $38 billion in 2007, according to Nicholas Lardy of the Peterson Institute for International Economics.

One reason for the reserve slump: China has been stepping up purchases of foreign companies and natural resources. That reduces the amount of foreign currency Beijing must recycle into Treasuries.

Chinese purchases of U.S. debt help fund the U.S. government's budget deficit. Last month, Premier Wen Jiabao worried publicly about the "safety" of those investments. If China were to sell its massive Treasury holdings, U.S. interest rates could soar. But domestic investors buy more than half of all Treasuries, and few think a major Chinese shift is likely.

"There's no way they're going to go out and dump them. … It's a symbiotic relationship; we need each other," says Win Thin, a senior currency strategist at Brown Bros. Harriman in New York.

Meanwhile, a separate Treasury Department report said no trading partner, including China, was guilty of "manipulating" its currency to gain unfair trade advantages.

The statement comes after Treasury Secretary Timothy Geithner told the Senate Finance Committee Jan. 21 that "President Obama — backed by the conclusions of a broad range of economists — believes that China is manipulating its currency."