China Continues to Trim its US Debt to Avoid Risks

Though China remains America’s largest creditor by virtue of holding the largest amount of U.S. debt through Treasury bonds, China  has also been selling a large portion of them in order to diversify risk. From the Economic Times:

China reduced its US Treasuries portfolio by $5.4 billion to $1.15 trillion in January, according to the data released by the US Treasury Department on Wednesday.

It is the third straight month of net selling after China’s holdings of US debt reached a peak of nearly $1.18 trillion in October 2010.

The $5.4 billion cut in China’s holdings doesn’t seem large by itself, but when China’s ever-growing foreign exchange reserves are taken into account it translates into a sharp decline in the proportion of US debt in China’s foreign exchange investment portfolio, said Lu Zhengwei, chief economist at Industrial Bank.

The holdings of $1.15 trillion accounted for about 40 percent of China’s total of $2.85 trillion in foreign exchange reserves by the end of 2010, the highest figure worldwide.

Some argue that U.S. bonds are more risk than they are worth, especially as the U.S. is approaching its debt ceiling. China seems to be adopting new strategies in terms of its investment portfolio. From Forbes blog:

“China has kept on lending money to the US to keep its export machine going, and to prevent losses” on its holdings of Treasuries, said Yu [Yongding, former China Central Bank advisor. ] “Perhaps it is too late to do anything about the existing stock without causing a serious political and financial backlash. But at least China should stop continuing building up its holdings.”

Bloomberg reporters noted that experts, including the current Chinese central bank adviser Li Daokui, have urged diversification of the nation’s foreign exchange reserves away from US debt after the country’s holdings of Treasuries rose to a record $1.175 trillion back in October.  They clearly didn’t listen (and Washington and its ambassador in China is surely scrambling to make sure they do not listen).  China has stated interest in diversifying its currency and debt holdings in its foreign reserve accounts by buying up other BRIC assets, mainly currencies in Russia, India and Brazil, one of the strongest and most stable currencies in the Americas.

March 18, 2011 9:27 PM
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