Cut in holdings of US debt may help diversify China's reserves

By Si Tingting (China Daily)
Updated: 2009-08-19 07:22

China drastically cut its holdings of US Treasury debt in June, but its purchase of more long-term securities indicates no significant change in its interest in US government bonds.

The country's holding of US Treasury securities fell to $776.4 billion in June, from a record high of $801.5 billion in May.

Despite the biggest monthly drop since 2000, China still retained its position as the top holder of US treasuries, according to US Treasury data released on Monday.

While slashing its holdings of short-term bills by 25 percent, to $158.7 billion, China rotated into longer-dated maturities by $27 billion, a 4.5 percent increase.

Japan and Great Britain, the second- and third-biggest holders of US debt, respectively, also increased their holdings of US treasuries by $34.8 billion and $51 billion respectively, almost all long-term.

"The fact that China has now returned and bought long-term notes is an encouraging sign," Patrick Bennett, Asia Foreign Exchange Rates Strategist with Societe Generale in Hong Kong, told China Daily. "It shows that China, as an investor, sees value in the issues and this speaks to the credibility of US policies."

Bennett dismissed the idea that China's reduction in the holding of US treasuries represents "a big move".

"The change is a slight surprise, but we need to see the next couple of months' data before determining the trend of purchases," he said.

China invested very little of its newly accumulated international reserves, about $122 billion, in US treasuries in May and June - just over 10 percent, contrasting sharply with the 60 percent to 70 percent figures seen in recent years, according to Tony Crescenzi, senior vice president, strategist and portfolio manager of PIMCO, a leading investment management firm.

"The recent pattern suggests China hastened its effort to diversify its international reserves," Crescenzi said.

China's foreign exchange reserves totaled $2.13 trillion at the end of June.

Yin Zhongli, a senior researcher with the financial research institution of the Chinese Academy of Social Sciences, believes that the share of US dollar-dominated assets in China's foreign exchange reserves is too large.

"So, we have to diversify our portfolio for risk aversion," Yin said, adding that the country might buy more assets denominated in other foreign currencies, such as the euro, the Japanese yen and the Australian dollar.

"But investment in US treasuries is still relatively safe compared with other options, because the recovery of the US economy is, by and large, stronger than other major economies, such as the European Union," he said.