China trims US Treasury holdings for third month

BEIJING / MUSCATINE, Iowa - China cut its holdings of United States Treasury securities by $3.19 billion in December to a 19-month-low of $1.10 trillion. The reduction came as the country continues to diversify its foreign-exchange reserves and indicates a growing interest in moving into euro assets.

December was the third consecutive month that China, the largest foreign creditor of the US, had disposed of US debt. Its holdings now stand at the lowest level since June 2010, according to data from the US Treasury Department on Wednesday.

China has trimmed $59.4 billion, or 5 percent of its holdings, over the last year, compared with $1.16 trillion in December 2010. China was the only country among the top five foreign creditors to make an overall reduction in holdings during 2011.

Wang Zihong, director of the Institute of American Studies with the Chinese Academy of Social Sciences, said the monthly cut was only the normal exercise of asset changes, but the 2011 reductions reflect concerns over dollar depreciation over the long term.

Wang also suggested that weakening foreign trade and slowing growth in the value of the foreign-exchange reserves resulted in China's decision to reduce its holdings.

In 2011, China's foreign-exchange reserves grew at the slowest pace in five years, adding $384.8 billion from the figure in 2010, down from the average $400 billion a year between 2007 and 2010, according to data from the State Administration of Foreign Exchange.

Dollar-denominated assets still account for the largest proportion of China's $3.18 trillion portfolio of foreign-exchange reserves, about 60 to 70 percent, while euro assets contributed between 10 and 20 percent.

The sale of US Treasury bonds came as China indicated increasing interest in becoming more involved in investing in euro assets.

On Wednesday, the Governor of the Chinese central bank, Zhou Xiaochuan, said in Beijing that China will continue to invest in eurozone government debt. Zhou expressed his confidence in both the euro and in the ability of eurozone members to solve their debt problems.

He Weiwen, an expert in Sino-US trade at the University of International Business and Economics in Beijing, said the reduction in US Treasury bond holdings is a way of freeing up more capital for investment in Europe. The ownership of fewer dollar assets will be a long-term strategy for the management of China's foreign reserves, He said.

Despite the country's weak economic recovery, US government bonds are still a hedging investment option because of their high liquidity, Wang said. But some analysts believe the trend is changing.

"The overall movement away from the US dollar indicates that people are not looking for a 'safe haven' as much as they were in late 2011 when the markets globally fell hard on concerns about the situation in Europe," said David Riedel, president of the New York-based Riedel Research Group, which provides analysis of emerging markets.

"The Chinese are boosting their purchases of European and other bonds because of the need to help stabilize those economies around the world that are major markets for Chinese goods," Riedel said.

However, Perry Wong, a senior economist at City National Bank in Los Angeles, said that given the current global financial environment, "diversification may not be a good option for China, particularly in the EU area".