Beijing reaffirms its commitment to US treasuries

PUBLISHED : Wednesday, 10 March, 2010, 12:00am
UPDATED : Wednesday, 10 March, 2010, 12:00am

Beijing yesterday renewed its commitment to US treasuries, while downplaying gold as a major asset class for its US$2.4 trillion in reserves.

The US bond market is important to China because it is the world's largest and China has big reserves, Dr Yi Gang, head of the State Administration of Foreign Exchange, said.

'[Buying and selling of US treasuries is] purely market driven. We would hope not to see this matter politicised,' Yi, also a vice-governor of the People's Bank of China, said.

China remained the largest holder of US Treasury securities with US$894.8 billion at the end of December, up from the US$727.4 billion a year earlier, the US Treasury said.

Yi made the remarks when asked if China would cut its holdings of US securities and to comment on the view of some American bankers that the large holdings pose a threat to the United States.

Sino-US relations have recently become more strained over issues including arms sales to Taiwan, Washington's support of the Dalai Lama, Google's complaints over cyber hacking and the strength of the yuan. Some American observers fear China may sell treasuries in a retaliatory move, though Beijing has never publicly threatened such action.

Sebastien Barbe, an economist with Credit Agricole Corporate & Investment Bank said: 'Policymakers basically are trying to cap expectations that China will accelerate its diversification efforts. And this may cap any rebound of the euro.'

China has built 'a moderately diversified' currency structure with its reserves, which include the US dollar, the euro, the yen and currencies of emerging countries, Yi said, adding that investment returns have been 'relatively good'.

'With regard to many friends' suggestion to increase gold holdings, we will consider it cautiously according to market conditions,' he said.

In its first such move in nine years, the International Monetary Fund sold 200 tonnes of gold to India's central bank in November to improve its financial strength. Last month, it announced that it would sell 191.3 tonnes of gold in the open market after failing to find central bank buyers. Yi said gold was 'not bad' as an asset. However, investment returns were not good considering its performance in the past 30 years. A significant purchase by China would push prices higher.

As a lesson of the global financial crisis, China will be 'more prudent' in liberalising yuan convertibility under capital accounts, the official said, adding it is expecting more capital inflows this year amid greater expectations of yuan appreciation.

On Saturday, central bank governor Zhou Xiaochuan said China will withdraw its stimulus policies at some point, including ending its 'special exchange rate mechanism'.

Yi said there were different views in various industries, regions and groups within China on whether the yuan should appreciate, but the exchange rate should be determined by the market.

Yi also said China is still studying whether to inject funds into China Investment Corporation, the country's US$300 billion sovereign fund.

China is considering allocating as much as US$200 billion to the fund as the reserves continue to climb, according to bankers and various media reports.

Lasting bonds

China remains the largest holder of US Treasury securities

The value of US treasuries held by Beijing at the end of December was nearly, in US$: $895b