Selling U.S. debt is a choice based on risk evaluations: expert

10:16, February 21, 2010      

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According to Treasury International Capital (TIC) data released by the U.S. Treasury Department January 16, China reduced its holdings of U.S. Treasury Bonds (T-bonds) by 34.2 billion U.S. dollars in December 2009. Industry experts pointed out that the reduction took place after a technical rebound of the U.S. dollar appeared and this does not mean that China will continue to sharply cut its holdings of U.S. dollar-denominated assets.

Over 4 percent

In September 2008, China surpassed Japan to become the biggest foreign holder of U.S. debt in the world. Later, China's status as the world's largest U.S. debt holder has not changed although it sometimes increased or cut its holdings of U.S. debt. This time, China regained its position as the world's second biggest foreign holder of U.S. debt by cutting its holdings of U.S. treasuries by over 4 percent, a record drop over the past several years.

According to Liu Yuhui, director of the Center of Chinese Economic Evaluation at the Institute of Finance and Banking under the Chinese Academy of Social Sciences (CASS), China has made a correct choice at the right moment because it dumped U.S. treasuries when the U.S. dollar technically rebounded for the purpose of avoiding risks.

He added that the increasing sovereign-debt risks in the Eurozone countries resulted from the Greek fiscal crisis had caused the euro to depreciate sharply recently, thus paving the way for the rebound of the U.S. dollar. Under this condition, U.S. debt holders take the opportunity to cut their holdings to avoid risks. However, the U.S. dollar will continue to depreciate in the long term. As a big holder of U.S. debt, China has made a correct decision to cut its holdings of U.S. debt when a technical rebound of the U.S. dollar appeared.

After cutting U.S. T-bond holdings in 2 consecutive months, China still holds U.S. treasuries of 755.4 billion U.S. dollars. In November 2009, China reduced U.S. treasuries by 9.3 billion U.S dollars.

According to Cao Honghui, director of the Financial Market Research Office under the CASS, the debt scale of the U.S. had shrunk, but further expanded after the international financial crisis, and whereas only private enterprises were in debt in the past, the public sector has now also incurred debt. The expanding debt scale of the federal government and local government departments as well as the huge budget deficit will inevitably result in issuance of additional money and the depreciation of the U.S. dollar, which will cause a sharp shrink in the value of the U.S. dollar assets held by creditor countries.

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