China increases holdings of middle- and long-term US bonds

Chinese holdings of middle- and long-term US government bonds increased by $81.1 billion in 2013, the fastest growth pace in five years, despite the rising yields of the benchmark notes, data from the US Treasury Department showed.

Since 2009, China, the largest foreign US creditor, has increased its middle- and long-term US debt by $281.9 billion, which has provided a stable financing source for the US government.

Last year, the country's total holdings of the US debt rose by 4 percent, the second annual gain after falling in 2011 for the first time on record, according to the US Treasury.

But it doesn't mean that China will continually expand US debt holdings in the coming months, although signs of a stronger economic rebound have been seen this year, said Zhao Qingming, a professor at the financial school of the University of International Business and Economics.

"China's decision on whether to reduce or increase the US bond holdings will partly be influenced by the US Federal Reserve's policy stance in the short term," Zhao said. "To maintain the safety of our foreign exchange asset is the priority."

Compared with other investment instruments, US government bonds are still one of the optimal choices for the huge amount of Chinese foreign exchange reserves that expanded to $3.82 trillion by the end of December, analysts said.

The Fed announced plans to slow asset purchases in December, and it trimmed its $85 billion of monthly bond-buying by $10 billion in January and will cut the same amount in February.

Li Gang, a researcher at GF Futures, predicted the tapering pace of the US quantitative easing policy, known as quarterly easing, may not change this year unless a sudden economic deterioration happens.

"It means that in the near future, the Fed will continue to reduce its holdings of US government bonds and that will influence the bond prices and expected yields simultaneously. So China's investment returns from US bonds will also be affected," Li said.

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