The Department of the Treasury today updated its figures on foreign holders of Treasury bonds. The update appears to show that Chinese holdings of Treasuries fell slightly last year. This is nonsense.

The PRC accumulated $471 billion in surplus foreign exchange in 2010. Under Beijing’s own balance-of-payment rules, that money cannot be spent at home. This is not a matter of debate—it physically cannot be spent at home under current conditions.

So where is it? It is apparently not in new purchases of U.S. agency debt issued by Fannie Mae and Freddie Mac. No foreign market is nearly large enough to absorb the money—for example, China’s purchases of Japanese bonds are much, much smaller and may be shrinking.

The answer is Britain. No, not in Britain itself but in what are supposed to be British purchases of Treasuries in 2010. These stood at $360 billion in 2010 alone, tripling the “British” debt position in one year. There is no possible reason for the U.K. itself to buy anything like that much in U.S. bonds. As an illustration, the amount is far larger than British official reserves.

When Treasury compiles the numbers, it does not check the nationality of the ultimate bond-holder but only of the immediate purchaser. China is very likely buying through Britain on the order of $250 billion to $300 billion worth last year. It is also buying smaller amounts through offshore financial centers like the Cayman Islands.

Until the PRC either changes its balance-of-payment rules to allow money to flow freely or stops running huge external surpluses, it must buy U.S. Treasuries. It is a complete misunderstanding to read the monthly Treasury report as showing anything else.