Eurozone woes drive China back into US bonds

Updated: 2011-11-18 08:03

By Chen Jia (China Daily)

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BEIJING - China should be flexible in adjusting the composition of its foreign-exchange reserves and adapt to changing world economic conditions, analysts said, referring to a surge in the nation's holdings of US government securities in September.

The net increase in US Treasury holdings was $11.3 billion in September, the largest jump since March 2010.

The rise boosted China's total US debt holdings to $1.15 trillion, the US Department of the Treasury said in a report on Wednesday.

The lack of clarity about a resolution of the eurozone debt crisis, coupled with deepening doubts over a global economic recovery, sparked China's move to invest in safer assets such as US government securities, analysts said.

"This is a relatively better choice when European leaders are still suffering from the headache of a debt overload," Zhuang Jian, senior economist with the Asian Development Bank, said on Thursday.

Eurozone woes drive China back into US bonds

The adjustment of the composition of foreign-exchange reserves in September was "reasonable", said Zhuang.

Preserving and increasing the value of the foreign securities "is the priority task for the Chinese top foreign-exchange administrators", he added.

China, the largest foreign creditor of the US, cut Treasury holdings by $36.5 billion in August after rating agency Standard & Poor's downgraded Washington's long-term debt rating to AA+ from AAA.

That reduction by China ended four consecutive months of rising investment in US debt.

Lu Zhengwei, chief economist at Industrial Bank Co Ltd, said that compared with the gloomy and uncertain economic situation in Europe, lending to the US could provide relatively safer returns.

According to a report released on Wednesday by the People's Bank of China (PBOC), as of Sept 30, the euro had fallen 7.72 percent against the dollar compared with the end of June.

As of Sept 30, the 10-year US Treasury yield was 1.92 percent, down 124 basis points from the end of the second quarter, the PBOC report showed.

"The decrease in the US securities yield indicated more positive market expectations for their long-term return," said Lu, who forecast faster economic growth in the US in the coming months.

China bought $20.7 billion of long-term US government debt in September, after sales of $40.1 billion in August and $30.9 billion in July, the US Treasury report said.

The US economy is recovering at a relatively faster pace than earlier this year, which has rekindled global investors' appetite for US debt, analysts said.

Japan, the second-largest foreign investor in Treasury securities, lifted its holdings by 2.2 percent to $956.8 billion in September.

The United Kingdom increased its US debt holdings to $421.6 billion in September from $397.2 billion in August, the Treasury figures show.