China's move to reduce US debt holdings normal

15:21, March 21, 2011      

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Data recently released by the Treasury Department of the United States shows that China reduced its holdings of U.S. debt by 5.4 billion U.S. dollars in January. This is the third consecutive month China has reduced holdings of U.S. debt. However, China is still the largest creditor nation of the United States. Experts said that reducing holdings of U.S. debt is normal market behavior, and the outside world should not exaggerate its meaning.

Data also shows that China’s holdings of U.S. debt fell from more than 1.16 trillion U.S. dollars in December 2010 to more than 1.15 trillion U.S. dollars in January 2011. China has reduced its U.S. debt holdings twice in December and November 2010.

Although China reduced its holdings of U.S. debt, China is still the largest creditor nation of the United States. China now still holds a total of more than 1 trillion U.S. dollars of U.S. debt. Actually, the revised data released by the Treasury Department of the United States at the end of February shows that the peak value of China's U.S. debt holdings appeared at the end of October 2010 when it reached 1.17 trillion U.S. dollars.

Officials from the State Administration of Foreign Exchange (SAFE) previously announced on their official website that the foreign exchange reserve holding U.S. debt is a kind of investment behavior in the market, and both increasing and reducing the holdings are normal investment operations.

As many factors such as economic cycle fluctuations and changes in market supply and demand will affect the price volatility of government bonds, and changes in the prices of other assets will also affect the relative attractiveness of bonds, China has been paying close attention to and traced various changes in the investment activities, and continued to implement dynamic optimization and adjustment operations, SAFE officials said. Therefore, the outside world does not need to make political interpretation on this, they said.

Ding Zhijie, associate dean of the School of Banking and Finance under the University of International Business and Economics, said on March 17 that China cut its holdings of U.S. national debt out of concern for the safety, liquidity and profitability of its foreign-exchange reserves.

After the global financial crisis, the United States adopted stimulus monetary and fiscal policies, which greatly increased its fiscal deficit and debt-to-GDP ratio, thereby raising international concern over the safety of dollar-denominated assets. From the perspective of profitability, it is reasonable and financially important for China to reduce its holdings of U.S. debt.

Market analysts believe that overall, the changes in China's holdings of U.S. debt over the past year were determined by the market environment, and there have been both decreases and increases. This shows that China has been actively managing its foreign-exchange reserves and making long-term diversified investments. An investment portfolio comprising various complementary assets can effectively reduce the overall investment risk, meet liquidity needs and stabilize overall asset value.

In addition, China's adjustments to the currency composition and structure of its foreign-exchange reserves are carried out on a gradual basis, and will not have much impact on related markets. As most countries are paying increasing attention to the profitability of foreign-exchange reserves, the United States should take a responsible attitude and adopt effective measures to maintain the sustainability of its own and also the global economy, and to protect the interests of investors and maintain investor confidence.

By Li Jia, People’s Daily Online

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