China trims US Treasury holdings in June

Overall, total foreign holdings of US Treasuries dropped for the third straight month.

China trimmed its holdings 1.7 percent to $1.28 trillion, while Japan, the second-largest buyer of US debt, cut its holdings by 1.8 percent to $1.08 trillion, according to the monthly Treasury International Capital report.

John Praveen, chief investment strategist at Prudential International Investments Advisers LLC, gave several possible reasons for the $21.5 billion drop from May to June in China's purchases of US government securities.

Among those reasons: China might want to defer purchases until yields rise with an improvement in the US economy.

Mei Xinyu, a senior researcher with the Ministry of Commerce, said that compared with other international currencies, the US dollar is relatively stable, so it's hard to modify China's investment mix.

Praveen said: "There is a general expectation that Treasury yields are headed up. So why buy now when we can buy when Treasury yields go up to 3.5 percent or 4 percent over the next couple of months?"

He added that the reduction in China's purchases of US securities could mean that Beijing's resources are shrinking, amid its transition to an economy driven by consumption rather than investments and exports.

"If you're not an export-driven economy and you are more of a consumer-driven economy, your exports will come down, your imports will increase, so your current account deficit will come down," Praveen said.

"So they have less money to invest. It may be part of that overall strategy, of reducing how much money they put into the US Treasury market."

Praveen said China's reduction in Treasury buying might also reflect a desire to diversify its holdings.

On Thursday, a drop in US Treasuries pushed yields on 10- and 30-year securities to the highest level since August 2011.

Xu Hongcai, a senior financial researcher at the China Center for International Economic Exchange, said: "It is urgently necessary to diversify the investment in US Treasury bonds, as the … reduction of asset purchasing will drag down the bonds' value."