China piles up yet more US debt
Beijing lifted its holdings of US Treasury securities in June, reigniting debate about the use of China's US$3.2 trillion in foreign reserves following the recent downgrading of America's long-term debt.
According to data from the Treasury Department released yesterday, China's holdings of US Treasuries increased US$5.7 billion to US$1.1655 trillion by the end of June. It was the third straight month China had increased its holding of US debt.
Standard & Poor's downgraded the United States' long-term credit rating to AA+ from AAA early this month. The ratings cut led to increasing calls from mainland media and leading economists to cut the nation's holdings of US Treasuries as a way to diversify the country's massive foreign reserve stockpile.
Li Daokui, an adviser to China's central bank, was quoted by Liaoshen Evening News yesterday as saying that Beijing should gradually reduce its holdings of US debt.
China, the largest creditor of the US, had parked more than one-third of its foreign reserves in US Treasuries by the end of June, and two-thirds of its stockpile of foreign currencies is now US-dollar-denominated assets.
Beijing's boosting of its holdings of US government bonds in June was in contrast to the weaker demand for US equities and bonds from foreign investors at that time.
Foreign investors were net sellers of US notes and bonds that month, cutting holdings by US$4.487 billion, the first time that they had become net sellers since January 2009.
'It is a dilemma for China,' said Galaxy Securities chief economist Zuo Xiaolei. 'China talks about diversification, but it has no good alternatives to US Treasuries.'
If China were to reduce holdings of US bonds, it could cause a panic in the markets, further hurting its own interests, economists said.
Saying that although there were risks in holding US Treasuries, Guo Shuqing, chairman of China Construction Bank, told the influential Capital Week magazine that US bonds were still the best products for China to buy because they remained the safest bet amid uncertainties in the global economy.
China continued to report trade surpluses and received increasing foreign direct investment last month. The trade surplus grew to US$31.5 billion in July from June's US$22.3 billion, while inbound investment jumped 19.8 per cent from a year ago to US$8.3 billion last month.
The increasing capital account surplus added additional pressure on Beijing as it confronted stubborn inflation at home. Stephen Green, Standard Chartered Bank's China head of research, said Beijing should make the yuan stronger to balance its current and capital accounts.
'The consequence of keeping the yuan weak for even longer will simply be more inflation and more US Treasury purchases,' he said.
Amount, in US dollars, by which China's US Treasuries rose in June
- Its holdings of US debt hit US$1.1655 trillion