Analysts speculate that the sale might be short term, market-based

BEIJING - China reduced its holdings of US treasury bonds in December for the second straight month, but analysts said it is market-based short-term move and would not substantially change the country's foreign exchange reserves basket.

The biggest buyer of US treasury debt cut its holdings by 0.4 percent to $892 billion, the US Treasury Department said on Tuesday, after unloading $11.2 billion to $895.6 billion in November.

Before that, China had increased its portfolio for four straight months.

"Since the financial crisis, China has been trying to adjust the investment structure of its foreign reserves to control risks. As the dollar rebounded in the last two months, it might be a market strategy to sell the debt for the time being," said Wang Jun, economist at China Center for International Economic Exchanges.

Although China is still the largest foreign holder of the US debt, the difference in its holdings in relation to Japan's, the second-largest, has shrunk from $123.8 billion at the beginning of 2010 to about $8 billion by the year's end.

China has vowed to diversify its $2.85 trillion foreign-exchange reserves portfolio to counter risks and keep the value of the assets.

The large amount of foreign reserves will increasingly challenge the nation's foreign exchange asset management, said Yi Gang, vice-governor of the central bank and head of the State Administration of Foreign Exchange, in January.

Wang said other debt-purchase options cannot match the strength and security of US debt in the short term, although the government is well aware of the necessity to diversify to lower the risks.

In December 2010, foreign holdings of Treasury securities rose 0.6 percent to $4.37 trillion. Japan increased its holdings by 0.7 percent to $883.6 billion in December, followed by Britain, which boosted its holdings by 5.8 percent to $541.3 billion.

In 2010, China cut its holdings by $3.2 billion from $895 billion one year earlier. Japan's portfolio increased by $118.4 billion while Britain tripled its holdings of US treasury securities in the same period.

Zhang Monan, a researcher with the State Information Center, said as the US monetary-easing policy will dilute the value of the dollar and China's dollar assets in the longer term, the net selling is a natural move to control risks and the country will continue to diversify its investment.

China may increase holdings of treasury debt in Europe. It has promised to purchase Spanish treasury debt of 6 billion euros ($8.1 billion) and expressed interest in buying Portuguese and Greek debt.

Compared with treasury bonds, it is better to explore other channels, said Wang. He suggested the government exchange the treasury debts for shares in infrastructure construction programs in US, support overseas expansion of Chinese enterprises, or use the money to supplement domestic retirement pensions.

Yi said at a seminar on Feb 13 that as the exchange rate of the yuan floats to a balanced level, domestic enterprises and individuals would tend to buy overseas assets. By then, the government should be able find a way to transfer the assets at hand - such as US treasury bonds - to them, which will release the pressure of keeping the value of foreign reserves.

China Daily

(China Daily 02/17/2011 page13)