Holding of US debt hits highest in year

09:30, December 17, 2010      

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The future of China's massive holdings of US Treasury debt appears to be shrouded in mystery, as the US plans to engage in a new round of quantitative easing that could diminish the dollar's value, economists warned Thursday.

China in October increased its holdings of US Treasury bonds by 2.3 percent, to $906.8 billion, bringing the country's holdings to their highest level since November of last year, according to updated US Treasury Department data released Wednesday.

The US Federal Reserve was still the top holder of the country's debt, with $996 billion, but China remained the largest foreign holder.

October was the fourth straight month that China increased its holdings of US Treasury bonds, sparking fears that the growing appetite for US government debt may bring huge losses to China's investment as the US prints more money.

Last month, the US Federal Reserve announced plans to buy an additional $600 billion Treasuries by the end of the second quarter of 2011 to pump more money into its economy - a move seen by many as further devaluating the dollar and ultimately creating inflation.

Song Guoliang, a professor of finance at the University of International Business and Economics, told the Global Times that the new quantitative easing measures could depreciate the greenback, meaning the value of China's holdings will diminish.

Qing Yi, a noted economic observer and chief economist of Hengtai Security, told the Global Times that instead of investing in US Treasury bonds, China should focus on investment to boost domestic demand.

"That could create jobs for young people and tackle the high unemployment rate," Qing said.

Early last year, Zhang Weiying, a professor at the Guanghua School of Management at Peking University, suggested that China should give its $1 trillion in dollar reserves to its citizens to help boost domestic consumption, saying a big devaluation of dollars may dilute the earnings of the investment in US treasury bonds.

Jia Kang, director of the Research Institute for Fiscal Science at the Ministry of Finance, said that holding that much US debt is a passive move.

"With a large amount of foreign exchange reserves, resulting from a trade surplus, China has no better choice but to lend them to the US to earn some interest, since it declines to sell us high-tech products," Jia said, adding that, compared with simply saving the money, investing in US bonds could bring more returns.

The new US Treasury statistics also show that China's holdings in short-term Treasuries rose $25.4 billion, though holdings of long-term bonds actually fell $2 billion in October.

Michael Pettis, a Beijing-based finance professor with the Carnegie Endowment for International Peace, told the Global Times that if China's central bank believes that there will be a significant increase in inflation and worries that the dollar will continue to devaluate from quantitative easing, then the bank should be selling long-term bonds and buying short-term bonds.

Guo Tianyong, director of the Research Center of China Banking at the Central University of Finance and Economics, told the Global Times that "foreign exchange reserves are hard-earned money. Investment in foreign reserves shouldn't concentrate on investments in dollar assets."

"A more diversified investment portfolio, such as investment in gold and strategic energy, is preferable to having such huge holdings in US debt," he said.

Huang Jingjing and Cao Xiaochen contributed to this story

Source: Global Times
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