Foreign demand for long-term U.S. financial assets rose in September as China and other countries boosted their holdings of Treasury securities.
Continued strong foreign demand for U.S. debt is critical to financing America's soaring budget deficits and keeping American interest rates low enough to support a recovery from the recession.
The Treasury Department said Tuesday that foreigners purchased $40.7 billion more in assets than they sold in September, the biggest jump since June. The September gain compared with a revised $34.2 billion increase in holdings in August.
China, the largest foreign holder of U.S. Treasury securities, boosted its holdings by $1.8 billion to $798.9 billion in September.
President Barack Obama and Chinese President Hu Jintao covered a wide range of issues during two hours of talks in Beijing on Tuesday as part of a three-day visit by Obama to China, a trip seen as an effort to forge closer ties with the emerging economic super power.
The discussions produced no reported breakthroughs on the many areas of economic tension between the two countries, including America's unhappiness that China is not allowing its currency to rise in value against the dollar.
The Chinese central bank last week did send a signal that currency traders read as an indication it might begin allowing the yuan to rise in value sometime in the future. American manufacturers contend the yuan is undervalued by as much as 40 percent and they blame the weak Chinese currency as a primary reason for America's huge trade deficit with China. A weak yuan makes Chinese goods cheaper in the U.S. and American goods more expensive in China.
China's foreign holdings of Treasury securities are a direct result of the huge trade deficits the U.S. runs with China. The Chinese take the dollars Americans pay for Chinese products and invest them in Treasury securities and other dollar-denominated assets. American manufacturers argue that the huge dollar reserves China is building up reflect a strategy by the Chinese government to keep its currency artificially low against the dollar.
For September, Japan's holdings of U.S. Treasury securities rose $20.3 billion to $751.5 billion.
Other countries with large holdings of U.S. Treasury securities also increased them in September with Britain's investment rising to $249.3 billion, from $226.9 billion. The Treasury holdings of Brazil rose to $144.9 billion, from $137.3 billion in August. Russia's holdings posted a small increase to $121.8 billion in September, from $121.6 billion in August.
The U.S. deficit hit an all-time high of $1.42 trillion for the budget year that ended Sept. 30 and is expected to rise even higher in the current year. The administration has said it was important to spend heavily to bolster the financial system and jump-start the economy to avoid an even deeper recession. But officials have indicated Obama will make deficit reduction a key priority once the economic recovery has gained momentum.