<html> <head><style type ="text/css">body { font-family: "Bloomberg Prop Unicode I", Verdana, sans-serif; font-size:125%; letter-spacing: -0.3pt; color: #FF9F0F; background-color: #000000; text-align: left; } p {line-height: 1.25em; max-width:900px; width:expression(document.body.clientWidth > 900? "900px": "auto" );} h1, h2, h3 { text-align: left; font-weight: normal; color: #FFFFFF; } h1 { font-size: 130%; } h2 { font-size: 115%; } h3 { font-size: 100%; } #bb-style { font-size: 90%; max-width:900px; width:expression(document.body.clientWidth > 900? "900px": "auto" ); } b, strong { font-weight: bold; } i, em { color: #FEC54A; } pre { font-family: "Andale Mono", "Monaco", "Lucida Console"; letter-spacing: -0.3pt; line-height: 1.25em; } table { border: 0; font-size: 90%; width: 100%; margin-left: auto; margin-right: auto; } td, tr { text-align: left; } td.numeric { text-align: right; } a:link { color:#53B2F5; text-decoration: none; } a:visited {color:#53B2F5} a:active {color:#53B2F5} a:hover {color:#53B2F5} </style> </head> <body> <p>By Mark Whitehouse</p>&#xD; &#xD; <p>Even as China's leaders criticize the U.S. for its poor fiscal management, their central bank remains remarkably loyal to U.S. government bonds.</p>&#xD; &#xD; <p>Chinese holdings of U.S. Treasuries rose $5.7 billion to $1.166 trillion in June, the U.S. Treasury reported today. The increase came as other foreign investors -- including Brazil and "Caribbean Banking Centers," which some see as a proxy for hedge funds -- pulled out of Treasuries amid growing concerns over the U.S. debt-ceiling debate. Total foreign holdings of U.S. Treasuries fell by about $17 billion to $4.499 trillion in June, the first drop since April 2009.</p>&#xD; &#xD; <p>China, of course, has little choice but to put its money in U.S. government bonds. The country's large and growing trade surplus generates a lot of income in dollars. The U.S. currency has to be invested somewhere, unless China wants to allow the value of the yuan to appreciate against the dollar, a move that would make Chinese exports less competitive.</p>&#xD; &#xD; <p>Problem is, China's policy contributes to the fiscal malaise its leaders decry. The more U.S. bonds China buys, the lower the U.S. government's borrowing costs and the less pressure politicians feel to get the country's long-term finances under control. Let's hope the folks in Congress don&#x2019;t get lulled into a false sense of security.</p>&#xD; &#xD; <p>(Mark Whitehouse is a member of the Bloomberg View editorial board.)</p> </body> </html>