With US quantitative easing winding down, the debate about China’s commitment to resuming its role as the largest purchaser of Treasury debt is maddeningly circular. China would be crazy to torpedo a market in which so much of its wealth was tied up, says one camp. Sceptics retort that the Chinese eventually will realise they are acting as enablers in an untenable fiscal Ponzi scheme and cut their losses.

The situation is more nuanced. China must buy dollar-denominated assets – though not necessarily government debt or any fixed income instrument for that matter – to maintain (critics would say “manipulate”) exchange rates. This, in addition to anxiety about supplies, may lie behind the rash of deals by China to enter into loans-for-commodities deals and buy entire resource-owning companies abroad. Still, such moves can soak up only so many dollars and no other market rivals the depth and liquidity of US government debt.

Though far from a fully-fledged retreat, the latest data indicate that Chinese Treasury holdings have been declining slightly since a peak in October 2010. The decline is more significant in the context of booming issuance and Federal Reserve purchases. In late January, the Fed passed China as the single largest holder of Treasury debt, a little more than two years after China passed Japan. At $1,140bn, up from $70bn a decade ago, China’s holdings remain huge but its stash has stopped growing – something that might have sent yields higher a few years ago. Instead, QE2 has allowed six-month T-bills to drop to their lowest-ever yield even as China has reduced its share of outstanding debt to below 8 per cent, the same level as two years ago.