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Holdings of US Debt Cut by $5.4 Billion

Data Analysis 10:05:05AM Mar 18, 2011 Source:SMM

SHANGHAI, Mar. 18 -- China trimmed its holdings of US debt in January, a move that underlines Beijing's strategy to diversify its foreign reserve portfolio to avoid risks, analysts said.

China, the biggest foreign holder of US Treasuries, reduced its portfolio by $5.4 billion to $1.15 trillion in January, according to data released by the US Treasury Department on Wednesday. It's the third straight month of net selling after China's holdings of US debt reached a peak of nearly $1.18 trillion in October 2010.

The reduction comes after other foreign investors purchased a total of $46.5 billion Treasury notes and bonds in January, according to the data.

In isolation, the $5.4 billion cut in China's holdings doesn't appear large, but when China's ever-growing foreign exchange reserves are taken into consideration the move translates as a sharp decline in the proportion of US debt in China's foreign exchange investment portfolio, said Lu Zhengwei, chief economist at Industrial Bank.

The holdings of $1.15 trillion accounted for about 40 percent of China's total of $2.85 trillion in foreign exchange reserves by the end of 2010, the highest figure worldwide.

"The continued selling is in line with China's plan to diversify its huge amount of foreign exchange reserves away from investing in US assets to avoid risks," Lu said.

"Though holdings might fluctuate based on short-term market conditions, from a long-term point of view, the proportion is set to go down."

Yu Yongding, a former adviser to the Chinese central bank, told Bloomberg last week that the US may reach its congressionally-mandated debt limit of $14.3 trillion in a few months, which could lead to a default. Yu was quoted as saying that China should stop buying US Treasuries because the "cost" of lending to a nation that may face a default on its debt is too high.

However, Xia Bin, senior economist and counselor to the State Council, told China Daily last year that Beijing will not "dump" its holdings of US Treasuries because the move would cause chaos in both the global economy and international markets.

Xia's line was echoed by Wang Jianwen, chief economist with Southwest Securities, who said China's foreign reserve diversification will not lead to a scenario whereby US debt would lose its position as China's top investment tool.

"China's investment portfolio will be spread proportionately across its major trading partners in the future to counter trade imbalances," Wang said. "In the long term, China's holdings of Japanese and euro debt will grow in proportion to the portfolio."

Wang also said that China's sale of Japanese debt last year was "an investment decision based on expectations of the short-term economic outlook". China sold net 37.4 billion yen ($460 million) of Japanese national debt and net 430.4 billion yen of money-market instruments in 2010.
 

Key Words:  China macro economy 

Holdings of US Debt Cut by $5.4 Billion

Data Analysis 10:05:05AM Mar 18, 2011 Source:SMM

SHANGHAI, Mar. 18 -- China trimmed its holdings of US debt in January, a move that underlines Beijing's strategy to diversify its foreign reserve portfolio to avoid risks, analysts said.

China, the biggest foreign holder of US Treasuries, reduced its portfolio by $5.4 billion to $1.15 trillion in January, according to data released by the US Treasury Department on Wednesday. It's the third straight month of net selling after China's holdings of US debt reached a peak of nearly $1.18 trillion in October 2010.

The reduction comes after other foreign investors purchased a total of $46.5 billion Treasury notes and bonds in January, according to the data.

In isolation, the $5.4 billion cut in China's holdings doesn't appear large, but when China's ever-growing foreign exchange reserves are taken into consideration the move translates as a sharp decline in the proportion of US debt in China's foreign exchange investment portfolio, said Lu Zhengwei, chief economist at Industrial Bank.

The holdings of $1.15 trillion accounted for about 40 percent of China's total of $2.85 trillion in foreign exchange reserves by the end of 2010, the highest figure worldwide.

"The continued selling is in line with China's plan to diversify its huge amount of foreign exchange reserves away from investing in US assets to avoid risks," Lu said.

"Though holdings might fluctuate based on short-term market conditions, from a long-term point of view, the proportion is set to go down."

Yu Yongding, a former adviser to the Chinese central bank, told Bloomberg last week that the US may reach its congressionally-mandated debt limit of $14.3 trillion in a few months, which could lead to a default. Yu was quoted as saying that China should stop buying US Treasuries because the "cost" of lending to a nation that may face a default on its debt is too high.

However, Xia Bin, senior economist and counselor to the State Council, told China Daily last year that Beijing will not "dump" its holdings of US Treasuries because the move would cause chaos in both the global economy and international markets.

Xia's line was echoed by Wang Jianwen, chief economist with Southwest Securities, who said China's foreign reserve diversification will not lead to a scenario whereby US debt would lose its position as China's top investment tool.

"China's investment portfolio will be spread proportionately across its major trading partners in the future to counter trade imbalances," Wang said. "In the long term, China's holdings of Japanese and euro debt will grow in proportion to the portfolio."

Wang also said that China's sale of Japanese debt last year was "an investment decision based on expectations of the short-term economic outlook". China sold net 37.4 billion yen ($460 million) of Japanese national debt and net 430.4 billion yen of money-market instruments in 2010.
 

Key Words:  China macro economy