Sale of Japanese T-bonds won't affect forex diversification

By Wang Xiaotian (China Daily)
Updated: 2010-10-12 07:58
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BEIJING - The recent sale of Japanese treasury bonds will not affect China's accelerating foreign reserve basket diversification in which it will continue acquiring treasury bonds from major economies, analysts said.

But the country also needs to consider other investment channels, they said.

China cut its Japanese debt holdings by a net 2.02 trillion yen ($24.5 billion) in August - the biggest single-month sale since 2005, Japanese Ministry of Finance data published on Oct 8 said.

"Given August's yen-to-dollar exchange rate hike, the sale was an example of market-based investment behavior intended to reap sound returns when the price rocketed," China Galaxy Securities Chief Economist Zuo Xiaolei said.

She said the holdings reduction was as normal an example of investment behavior as the previous months' consecutive purchases of Japanese debt.

China bought Japanese debt several times from January to July. The move was part of the government's strategy of diversifying its $2.45 trillion in foreign reserves, which had previously focused on US debt.

It bought 583.1 billion yen worth of Japanese debt in July, following purchases of 735.2 billion yen in May and 456.4 billion yen in June.

In 2010, it has bought a total of 2.31 trillion yen in Japanese debt, or more than nine times the record of 253.8 billion yen in 2005. That year, pessimism in the United States about its domestic economy weakened the dollar and sovereign debt problems dragged down the euro.

China's US treasury bond holdings rose slightly to $846.7 billion in July, after two months of declines. But it was still $91.6 billion less than its September 2009 peak of $938.3 billion, the US Treasury Department.

China also tripled its South Korean treasury bond holdings in the first nine months of 2010, the Seoul-based Financial Supervisory Service said.

And Premier Wen Jiabao expressed interest in new Greek treasury bonds on Oct 4 in Athens.

Zhao Xijun, vice-head of the School of Finance at Renmin University of China, said China is continuing to diversify its foreign exchange reserve portfolio, despite the fact that it recently bought more US bonds while reducing its Japanese debt holdings.

"Investors' strategies are adjusted according to changes in the market environment," he said.

The flexibility has also shown that China has not used foreign reserves as a tool for applying political pressure, he added.

Li Wei, an economist with Standard Chartered Bank in China, said that, "considering the rate of return and various currencies' fluctuations, Asian countries' debts are attractive in the short and medium term".

While China has other debt purchase market options, they cannot match the strength of US debt in the short term, said Chen Daofu, policy research chief of the Financial Research Institute of the State Council's Development Research Center.

"Actually, decision-makers know the yields from US debt are questionable, but it's hard to find any other investment channel that is as good," Chen said.

Guo Tianyong, an economist at the Central University of Finance and Economics, said it is time for China to use its foreign reserves to back up domestic enterprises' investment in the real economy overseas, rather than merely focusing on stabilizing returns and reducing risks.

This is especially true in strategic or emerging industries, Guo said.

State Information Center researcher Zhang Monan said: "Debt-driven economic development is not sustainable in these countries. Risks created by the unstable world economy have been increasing."

Tang Min, deputy secretary-general of the China Development Research Foundation, said China should also consider putting the money into the programs of international organizations, such as the World Bank and the Asian Development Bank. This will allow it to garner more goodwill while diversifying its foreign reserve basket.

The Chinese government announced in September plans to accelerate investment in special economic zones in Africa through a partnership with the World Bank.

China Daily