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China's cut of US bonds 'response to weaker dollar'

(Xinhua)
Updated: 2009-06-16 23:01

BEIJING - For the first time in more than one year, China reduced its holding of US Treasury bonds, and experts told Xinhua Tuesday that move reflected concern over the safety of US-dollar-linked assets.

Data from the US Treasury showed China pared its stake in Treasury bonds by US$4.4 billion, to US$763.5 billion, as of the end of April compared with March.

Related readings:  China's US bond holdings decline

Tan Yaling, an expert at the China Institute for Financial Derivatives at Peking University, told Xinhua that the move might reflect activity by China's institutional investors. "It was a rather small amount compared with the holdings of more than US$700 billion."

"It is unclear whether the reduction will continue because the amount is so small. But the cut signals caution of governments or institutions toward US Treasury bonds," Zhang Bin, researcher with the Institute of World Economics and Politics of the Chinese Academy of Social Sciences, a government think tank, told Xinhua.

He added that the weakening US dollar posed a threat to the holdings of US Treasury bonds.

The US government began to increase currency supply through purchases  of Treasury bonds and other bonds in March, which raised concern among investors about the creditworthiness of US Treasury bonds. The move also dented investor confidence in the US dollar and dollar-linked assets.

China, the biggest holder of US Treasury bonds, is highly exposed. In March, Premier Wen Jiabao called on the United States "to guarantee the safety of China's assets."

China is not the only nation that trimmed holdings of US Treasury bonds in April: Japan, Russian and Brazil did likewise, to reduce their reliance on the US dollar.

However, Tan said that US Treasury bonds were still a good investment choice.

Hu Xiaolian, head of the State Administration of Foreign Exchange, said in March that US Treasury bonds played a very important role in China's investment of its foreign exchange reserves. China would continue to buy the bonds while keeping an eye on fluctuations.

Zhang said it would take months to see if China would lower its stake. Even so, any reduction would not be large, or international financial markets would be shaken, he said.

Wang Yuanlong, researcher with the Bank of China, said the root of the problem was the years of trade surpluses, which created the huge amount of foreign exchange reserves in China. It left China's assets tethered to the US dollar, he said.

He said making the Renminbi a global currency would cut China's demand for the US dollar and reduce its proportion in the trade surplus.