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T-Bonds remain a good option

By Wang Xiaotian (China Daily)
Updated: 2011-01-20 07:43

BEIJING - China shrank its holdings of US Treasury debt by $11.2 billion to $895.6 billion in November after increasing the portfolio for four straight months, though it remains the largest foreign holder, according to the US Treasury Department on Tuesday.

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Zhang Monan, a researcher with the State Information Center, said the net selling is a natural move to control risks as the US monetary easing policy is set to dilute the value of the dollar and China's dollar assets in the longer term.

"Although China may increase the holdings from time to time in accordance with the market situation, in the long term there is a tendency that the country will further diversify its foreign exchange portfolio," she said.

Analysts expected the debt issue, together with the yuan revaluation, to be part of the agenda of President Hu Jintao's ongoing visit to the United States.

The move followed net buying of more than $23 billion in October, after which China's holdings of US debt rose 2.6 percent to $906.8 billion, the highest level since November 2009.

The current holdings took up nearly one-third of China's foreign exchange reserves, which rose to a record $2.85 trillion by the end of last year, an 18.7 percent increase year-on-year, or $199 billion more than the nearly $2.65 trillion by the end of September, according to statistics from the People's Bank of China, China's central bank.

The large amount of foreign reserves will be increasingly challenging China's asset management, said Yi Gang, vice-governor of the central bank and head of the State Administration of Foreign Exchange on Monday.

China has vowed to diversify its foreign-exchange reserves portfolio, but an unstable recovery of global major economies made the path thorny, analysts said.

The country may increase holdings of treasury debt in Europe. It has promised to purchase Spanish treasury debt of 6 billion euros ($8.01 billion) and expressed interest in buying Portuguese and Greek debt.

"Although China has other debt purchase 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.

He said that in the short term, US Treasury debt remains a sound investment option for China, especially when Europe is still weighed down by sovereign-debt problems.

Treasury bonds of Asian countries such as Japan and Republic of Korea may also be good choices, but accelerating capital inflows and rising inflation in those economies may trigger increases in interest rates and a tightening of capital influx, which may cause losses for holders of their debts, said Li Wei, an economist with Standard Chartered Bank in China.

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 stable returns and risk control.

Analysts have suggested, for example, that China use the capital to buy energy and resource assets overseas.

On Wednesday, the People's Bank of China set the yuan's mid-point against the dollar at a record high of 6.5885 on Wednesday. It is up slightly from Tuesday's 6.5891. It has increased by more than 3.7 percent against the dollar since mid-June 2010.