China sold $34b in bonds in Dec; Japan becomes biggest foreign holder

China drastically slashed its holdings of United States government debt last December, allowing Japan to retake its place as the largest foreign holder of US Treasury bonds.

China sold more than $34 billion in short- and long-term bonds, leaving its total holdings at $755.4 billion, according to US Treasury data released on Tuesday.

The country sold about $45 billion in US Treasuries in the last five months, Alan Ruskin, chief international strategist for RBS Securities Inc, said in a research note. He said it was a "long enough period to hint strongly at a trend".

Liu Yuhui, an economist with the Chinese Academy of Social Sciences (CASS), said now is a good time to cut holdings of US Treasuries as recent European debt concerns have driven up the US dollar.

"China has chosen the right strategy in slashing its huge holdings of US government debt as the greenback rebounds," said Liu, adding that there is no sign of change to the long-term weakness of the US dollar.

Massive US deficit spending and near-zero interest rates would also further erode the value of US bonds, said Cao Honghui, director of financial market research at CASS.

The White House released a budget plan on Feb 1 that predicted the deficit for this year would total a record $1.56 trillion, surpassing last year's $1.4 trillion, which re-ignited China's concern about its dollar assets.

As one of the US' biggest creditors, China has sought to diversify its portfolio of foreign exchange reserves over the past year as the share of US dollar-dominated assets is too large.

Premier Wen Jiabao said in March last year he was "worried" about the Treasury holdings and wanted assurances his country's US investments were safe, while Zhou Xiaochuan, governor of the People's Bank of China, proposed a new global currency to reduce reliance on the US dollar.

The net sales of US Treasuries in past months by China might carry a subtle economic and political message to the US, according to Eswar Prasad, a trade policy professor at Cornell University and former head of the International Monetary Fund's China division.

"Chinese leaders are deploying their reserves to try and pressure the US to stop haranguing China about its currency and trade policies, and to back off from interference in its domestic issues," he was quoted by AFP as saying.

However, Nicholas Lardy, a China expert at the Peterson Institute for International Economics in Washington, said he believes the dramatic cut in US Treasuries is purely a market move.

The China-US relationship was still relatively smooth last December so the political implications should not be over-emphasized, he told Xinhua News Agency.

The foreign holdings of US Treasury securities fell by $53 billion in December, surpassing the previous record drop of $44.5 billion in April last year.

While China cut its holdings of the US long-term securities, Japan and Britain increased their stakes.

Japan boosted its holdings of US Treasuries by $11.5 billion to $768.8 billion in December, outpacing China's $755.4 billion in the same month. Britain also increased its holdings to $302.5 billion from $277.6 billion.

Brazil boosted its holdings to $160.6 billion from $157.1 billion.

Xinhua, AFP contributed to the story

(China Daily 02/18/2010 page1)