Allure of US bonds wanes as China cuts holdings
Print Edition
The cut in US government bond holdings has signaled investment in US Treasuries is gradually losing appeal to China’s huge foreign exchange reserves.
According to data released last week by the US Treasury Department, China cut its holdings by US$5.2 billion to US$1.2391 trillion in January, marking the fifth consecutive month of cuts.
During the five months through January, the aggregate value of holdings was reduced by US$30 billion.
Analysts said the direct cause for the cuts was lower prospective yields from Treasuries holdings.
“As expectations rise on a looming interest rate hike by the US Federal Reserve, bond prices will likely drop, which will affect return on capital gains,” said Ding Zhijie, a finance professor at the Beijing-based University of International Business and Economics.
Apart from lower yield concerns, analysts believe a more important reason why China is cutting its holdings is because it aims to diversify the approaches in utilizing its foreign exchange reserves in medium and long terms. China’s foreign exchange reserves totaled US$3.84 trillion by the end of last year.
Due to low risk and fixed returns, China has long favored buying US government bonds, but such an option is being increasingly questioned because of low efficiency of assets operation.
Official data on the composition of China’s foreign exchange reserves are not publicly disclosed, even though analysts believe dollar-denominated assets take an excessively high portion of the reserves, which leaves it vulnerable to risks. Available data from the Bank for International Settlements in 2001 showed up to 80 percent of China’s foreign exchange reserves was dollar assets.
Tan Yaling, dean of the China Foreign Investment Research Institute, said that purchase of the Treasuries could be regarded as savings. However, new trends such as China’s rapidly growing outbound investment and foreign aid is foretelling more innovation and diversity to the foreign exchange reserves.
China became a net capital exporter for the first time last year when outbound direct investment outnumbered capital inflows. The ODI grew 14.1 percent year on year in 2014, sharply eclipsing the 1.7 percent growth recorded for foreign direct investment.
Premier Li Keqiang said late last year that China will promote the diversified operations of its reserves, calling on policy banks to enhance support to companies which plan to explore overseas markets.
With the establishment of the China-proposed Asian Infrastructure Investment Bank, the Silk Road Fund and China’s grand plans for the “Silk Road Economic Belt” and the “21st Century Maritime Silk Road” initiatives, both the Chinese government and domestic companies will need greater amount of foreign exchange, analysts said.
Ding said the optimization of China’s foreign exchange reserves structure will release foreign exchange capital, which is significant for meeting the growing needs.
“Whether to hold the US government bonds or not will be closely dependent on how China’s foreign exchange reserves are allocated,” Tan said.
Despite the cut, China remains the largest foreign holder of US bonds, followed by Japan.
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