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China's US treasury debt holdings up

By Xin Zhiming (China Daily)
Updated: 2009-02-19 07:53

The nation's holdings of the treasuries totaled $696.2 billion in December, up from $681.9 billion in November 2008, the US Treasury international capital flow report released yesterday showed.

Related readings: China buys $14.9b of US treasury China increases treasury holdings US treasury 'still the best option' US Treasury wants to borrow $550b

The rise in treasury debt has triggered concerns that the country's continual pile-up of US debt would lead to investment losses if treasury prices tumble in future.

China has accelerated its holdings of treasury debt since August 2008, when holdings grew by $23.7 billion month-on-month. By September, it had replaced Japan as the primary holder of these debt instruments.

Analysts said since the treasuries are relatively stable in value compared to other financial products, China has apparently aimed to play safe by buying up these US bonds.

However, now that China's holdings of treasuries account for one-third of its foreign exchange reserves, some warned that "putting all eggs in one basket" is risky.

"China needs to diversify its foreign exchange reserves basket," said Zhang Ming, economist with the Institute of Finance and Banking at the Chinese Academy of Social Sciences. "Its holdings of these treasuries face the danger of a price drop as the US is expected to issue more bonds to stimulate its economy," he told China Daily.

With US interest rates at near-zero levels, the dollar's value may slide, and its recent strong rally may not sustain, economists said. The sliding dollar will push down treasury debt prices, economists said.

"As these treasuries are much sought after by international investors, it is time China took advantage of the timing to cut its holdings," Zhang said.

China should use its abundant foreign exchange reserves to buy commodities and energy products to support its economic growth, said Guan Qingyou, a researcher with Tsinghua University.

Premier Wen Jiabao has said that the country is studying ways to use its foreign exchange reserves to buy equipment and technologies that are key to its economic development.

Despite uncertainties about the prices of US treasuries, international investors remain invested in the US market. The report has shown that net capital inflows into the US rose to $74 billion in December from $61.3 billion in the previous month.

Foreign holdings of dollar-denominated short-term US securities, including treasury bills, increased $2.1 billion in December.

Net foreign purchases of long-term securities reached $22.4 billion in December compared with a net selling of securities worth $37.6 billion in November, according to the report.