Chinese reserve accumulation has slowed down rapidly. As a result the growth of foreign ownership in US treasuries (USTs) has fallen. The global liquidity pump of Bretton Woods II, in which pegging emerging markets are recycling their increase in foreign exchange reserves into US treasuries in order to keep their currencies stable against the USD, has slowed, but not stopped altogether. Even as the economy has slowed, Chinese FX reserve growth has slowed, and so have its holdings of USTs.
As the pace of growth has slowed, and if we assume a continuing propensity of the US government to run large deficits, domestic savings may be called upon to finance the sovereign.
Source: Bloomberg and BIS Annual Report (2012)
In other words, financial repression. Still, we caution assuming too abrupt a shift in the financing of the US treasury market. Especially, we would note that even after two rounds of QE, there is still scope for the Fed to increase its purchases. Currently the Fed holds only 11% of total debt outstanding which is well below eg the BOE, and also below the BOJ (assuming current asset purchasing plans).
Finally, and contrary to popular belief, foreign holders of US treasuries also have scope to increase relative to domestic holdings, especially as sovereign bond markets in Europe are set to remain in distress.