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August 19, 2009

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China pares its holdings of US Treasury bonds

CHINA cut its holdings of US Treasury bills in June by the largest amount in nearly nine years in what economists viewed as a bid to diversify the country's foreign reserves and increase returns.

China trimmed its net Treasury bill holdings by 3.1 percent to US$776.4 billion in June, down from May's US$801.5 billion, the US Treasury Department said.

It was the biggest reduction in percentage terms since a 4.1 percent cut in October 2000, according to the monthly Treasury International Capital report.

"The figure is really surprising," said Jinny Yan, a Standard Chartered Bank economist in Shanghai. "China's US Treasuries holdings have fluctuated recently, which may be driven by expectations for (greater) returns."

Despite the cut, China remains the largest holder of US Treasuries, followed by Japan and the United Kingdom.

In June, China cut its short-term positions and added to its long-term holdings of the bonds.

"The June cut may have been driven by an incentive to cash in, as the bonds' interest rates rose recently," Lu Zhengwei, an Industrial Bank senior economist, said yesterday.

"The cut also fell against the backdrop of China's diversification of its foreign assets," Lu said. "However, diversification is a long-term and gradual move. The recent change showed that China's US Treasuries holdings may fluctuate in the future to maximize returns."

China's central bank did not make a public statement on the June move.

China cut its US Treasuries holdings for the first time in 11 months in April. But in May, China increased its Treasuries purchases.

The US Treasuries remain a major investment option for China given their high liquidity and the size of the US economy, Lu said. Economists also said that China may keep its US assets relatively stable despite measurable fluctuation, as though China is telling the world it is actively seeking alternatives.

China has already shown concerns over the safety of its mounting US assets and called for diversification.

In March, China suggested the creation of a new global currency, possibly based on the International Monetary Fund's Special Drawing Rights, which are used as the monetary standard for dealings between the fund and member governments.

China' foreign-exchange reserves grew by 18 percent year on year to US$2.13 trillion at the end of June, making it the only country in the world with forex reserves exceeding US$2 trillion.


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