Securities get shot in arm from bond buys

By Masaki Kondo and Keiko Ujikane (China Daily)
Updated: 2010-08-10 17:57
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China purchases more from Japan than it sold for sixth month in a row

TOKYO - China bought more Japanese bonds than it sold for a sixth straight month in June, heading for the biggest annual increase on record, helping fuel a rally in the securities that's seen yields reach a seven-low.

China purchased a net 456.4 billion yen ($5.3 billion) of Japanese debt in June, following net buying of 735.2 billion yen in May that was the most in records dating from 2005, according to a report released on Monday by the Ministry of Finance in Tokyo.

The dollar's slide against all 16 major currencies monitored by Bloomberg since the start of June has reduced the attractiveness of US assets for some investors. China should pare its holdings of dollars to counter the risk of a "sharp depreciation", Yu Yongding, a former advisor to the central bank, wrote in the China Securities Journal last month.

"China's purchase is probably a part of its efforts to hedge against a risk of the dollar's or euro's depreciation in the future," said Susumu Kato, chief economist in Tokyo at Credit Agricole CIB and CLSA. "In the long run, yen-denominated bonds will be held more broadly among Asian countries, which is positive for Japan's bond market."

China's net purchases of Japanese debt for the first half of the year amounted to 1.73 trillion yen, Monday's report showed. The total is nearly seven times as much as the figure for all of 2005, which was the biggest year for Chinese buying of Japanese bonds between 2005 and 2009.

Yields on Japan's benchmark 10-year bonds dropped to a seven-year low of 0.995 percent on Aug 4. The securities yielded 1.02 percent as of 10:43 am in Tokyo.

The 2005 record came at a time when China ended a decade-old peg of its currency to the dollar. A similar shift came in June this year, when Premier Wen Jiabao's government abandoned a two-year policy of keeping the yuan around 6.83 per dollar.

Pegging the yuan to the dollar meant China had to purchase dollars to prevent it from appreciating. As a result, China accumulated the world's largest foreign-exchange reserves, totaling $2.45 trillion in June.

Luring more foreign investors to Japanese government bonds is critical for the government as a shrinking domestic population threatens to erode the pool of savings that has sustained demand for the debt.

Finance Minister Yoshihiko Noda last month said China's purchases are welcome given policymakers' efforts to diversify the investor base of bonds.

About 95 percent of Japan's debt is held domestically, which sovereign-debt agencies have said supports the country's creditworthiness even as borrowings approach 200 percent of gross domestic product.

In a sign that base is waning, Japan's public pension fund, a holder of 12 percent of outstanding debt, sold more government bonds than it bought for the first time in nine years during the 12 months through March 2010.

Japan has been bolstering its ties with China, which became its largest customer for exports in 2009.

Japanese shipments to China tripled from 2000 to 2009, and Chinese demand has helped sustain Japan's recovery from its deepest postwar recession.

Bloomberg News