Experts call taper's effect on Beijing's holdings 'mixed'

China, the largest holder of US debt, cut its holdings of US securities for the second consecutive month in December, according to the latest data released by the US Treasury Department.

The world's second-largest economy shed $47.8 billion in holdings, dropping to $1.27 trillion in December from $1.32 trillion in November, the figures showed. China had previously broken the $1.3-trillion mark in holdings in October.

Japan, the second-largest holder, shed $3.9 billion of assets in December, which totaled $1.18 trillion.

Total foreign holdings of US Treasuries hit a new record of $5.79 trillion in December, which beat the March record of $5.73 trillion, according to the Treasury.

The sum of all foreign acquisitions in December - including long-term securities, short-term securities, and banking flows - was a monthly net outflow of $119.6 billion, much larger than the $16.6 billion outflow recorded in November.

Foreign sales of long-term securities were $45.9 billion, up from the sales of $29.3 billion in November.

China's holdings hit a record high in November, according to data from January, and the country also purchased a record amount of reserves in 2013, which Joseph Gagnon, senior fellow at the Peterson Institute for International Economics, said was "worrisome".

"This is indicative of how much China is resisting a flexible exchange rate, despite its pledge in the G-20 since 2010 to 'move more rapidly towards market-determined exchange rate systems'," Gagnon told China Daily.

The data, released monthly by the Treasury, tracks cross-border activity from foreign and domestic investors. The figures released on Tuesday after the Presidents' Day holiday showed activity from December, when the US Federal Reserve announced that it would be easing its bond-buying program from $85 billion a month to $75 billion.

"The taper's effect on China reserve accumulation is mixed," said Kent Troutman, research analyst at the Peterson Institute for International Economics. Troutman said that while he anticipates tapering will ease pressure on the People's Bank of China to accumulate reserves, a stronger US economic environment that allowed tapering to begin with will create stronger US consumer demand, creating "appreciation pressure," he told China Daily.

"Basically, the timing and intensity of these two factors - the investment channel and the trade channel - will determine how much appreciation pressure is created on the renminbi," Troutman said. "The Fed's taper was widely anticipated and thus I do not think this resulted in a sudden stop of appreciation pressure on China. How the PBoC responds to that pressure going forward is another matter."

Yi Gang, deputy governor at PBoC, wrote in an article for Qiushi magazine in January that it will be hard to maintain and increase the value of China's foreign exchange reserves due to monetary policies abroad.

The investment environment abroad is "generally not optimistic," he said, echoing similar remarks he made at Tsinghua University in November. "It's no longer in China's favor to accumulate foreign-exchange reserves," he said then.

After the Third Plenum meeting of the country's top leaders, governor at the central bank, Zhou Xiaochuan, said that China will "basically" end intervention in the currency market.

amyhe@chinadailyusa.com

(China Daily USA 02/19/2014 page1)