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18 May, 2012

China Pressing Ahead With Diversification of Reserves

By Wei Tian in Beijing and Zhang Yuwei in New York (China Daily)

Originally published on 2012-05-17 – China remains the largest foreign holder of US Treasury securities, a “safe haven” amid the eurozone crisis, but an ongoing decline in these holdings reflects the country’s determination to diversify its foreign reserves, experts said.

China boosted its stockpile of the securities by $14.7 billion to $1.17 trillion in March, the US Treasury Department reported on Tuesday, widening the gap with second-place holder Japan, which cut its March holdings by 0.2 percent to $1.08 trillion.

China’s holdings in February were adjusted to $1.155 trillion from the $1.179 trillion in the previous report, according to the Treasury International Capital paper. According to the revised data, China reduced its holdings by $11 billion in February rather than an increase of $12.7 billion as previously reported.

“The US Treasury Department has been re-calibrating the monthly data of foreign holdings of Treasury bonds to include purchases in offshore markets, thus a change in holdings by several billion dollars does not have significant meaning,” said Wei Liang, a researcher at the China Institute of Contemporary International Relations.

However, judging from the change in holdings over the longer term, China is still pursuing a strategy of diversifying its $3.3 trillion in foreign exchange reserves, Wei said.

China’s holdings of US bonds in March were down 11 percent from a peak of $1.315 trillion last July. All total foreign creditors increased their holdings of US Treasury securities by 9.7 percent during the same period. “This can be taken as evidence that China is realizing its commitments in rescuing Europe,” Wei said.

In March, overall foreign holdings of US long-term securities reached $5.118 trillion, up $17.8 billion, or 0.3 percent, from the revised level of the previous month. The March figure was the eighth consecutive monthly increase, indicating strong international demand for US debt.

The EU debt crisis was a major reason for the continued high foreign demand for US Treasury issues, experts said. “At present, economic and market uncertainty in Europe is promoting a flow of funds to safe assets such as US Treasury bonds,” said Lawrence Goodman, president of the Center for Financial Stability, a think tank in New York.

On Tuesday, before the latest Treasury data, debt-stricken Greece announced it would hold new elections. The news sent investors back to the US market.

Although Wei suggested China could shift its investment in euro-denominated assets to German bonds, he admitted that there are very few nations beyond the United States whose debt markets are large and safe enough for China.

“However, diversification does not necessarily mean shifting away from US debt. It can be a change between different US bonds, such as to Treasury inflation-protected securities, to offset losses amid the US government’s continuous easing policies,” he said.

“The purchase of Treasury bonds is not just for investment purposes only,” said Dominic Ng, chairman and CEO of East West Bancorp Inc.

With growing US-China bilateral trade, owning liquid US dollar investments is also important for trade settlement and hedging, said Ng. Nevertheless, Ng said China should diversify a portion of its more than $1 trillion in US investment away from Treasury issues because directly investing in the US economy will produce better returns.

“Capital investment from Chinese business or government in local economies or small to mid-market enterprises in the US will help the US to grow its economy and create more business and consumer confidence, and create more jobs in local markets,” Ng said.

Goodman expects China to remain a strong buyer of US Treasury debt, as the securities represent “a deep and liquid store of value”. He added: “As China’s trade surplus falls, resources will be increasingly devoted to domestic consumption and raising the standard of living in China. “Thus, surplus pools of capital will be lower, as will purchases of Treasury bonds.”

Contact the writers at weitian@chinadaily.com.cn and yuweizhang@chinadailyusa.com