Workers at D & R Technology, an auto sensor manufacturer bought by Wanxiang America, at Carol Stream, Illinois. Zhang Yuwei / China Daily

Beijing - China will probably continue to cut its holdings of US treasury bonds in the next couple of months to diversify its huge foreign exchange reserve, analysts say.

China, the biggest buyer of US treasury bonds, trimmed its holdings for a fourth straight month in February to $1.15 trillion, according to data released by the US Treasury Department, while total foreign holdings increased by 0.5 percent to $4.47 trillion over the same period.

"Since the financial crisis, China has been trying to adjust the investment structure of its foreign reserves to control risks," said Wang Jun, economist at the China Center for International Economic Exchanges.

China overtook Japan to be the leading foreign exchange reserve country in 2008 and its foreign exchange reserves increased by $197.4 billion in the first quarter of this year to $3.04 trillion by the end of March, a rise of 24 percent on the previous year.

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

Zhang suggests that somewhere between $800 billion to $1 trillion would be an "appropriate" level of US debt for China.

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 (SAFE).

However, it is hard for China to dump the debts it has purchased, because their market value would slump, which would in turn affect China's existing holdings, analysts said.

China indicated earlier in April that it was ready to buy more debt from the eurozone's weaker states, in a move to help stabilize the bloc's fragile finances and protect its business interests.

After investing billions of euros in Portuguese and Greek bonds, China is considering buying more European bonds to diversity its foreign reserves, said Song Zhe, China's ambassador to the European Union.

The Ministry of Foreign Affairs said earlier in Beijing that the country was also in talks with Spain.

Although the government is well aware of the necessity to diversify and reduce its risks, other debt-purchase options cannot match the strength and security of US debt in the short term, economists said.

"In the short term, US treasury debt remains a sound investment option for China, especially when Europe is still weighed down by sovereign-debt problems," said Chen Daofu, policy research chief of the Financial Research Institute of the State Council's Development Research Center.

However, concerns about China's holdings of US Treasury bonds are rising after Standard & Poor's, a major credit agency, lowered its outlook on the American sovereign debt.

On April 19, Hong Lei, the Foreign Ministry spokesman urged the US to adopt "responsible policies and measures" to protect the interests of investors.

Zhang Jianhua, head of research at the People's Bank of China, said concerns that the heavily indebted US government may not repay its debt could drive treasury yields higher and cause US debt prices to fluctuate.

Despite the worries, Zhang believed demand for US treasuries would stay healthy due to lack of investment alternatives.

China Daily