China diversifying foreign reserve holdings

China bought more Japanese bonds than it sold for a sixth straight month in June, which is a move that shows China is diversifying its massive foreign reserves, according to First Financial Daily.

China's recent purchase of Japanese debt is approaching the biggest annual increase on record, helping to fuel a rally in the securities market that has seen yields reach a seven-year low.

China purchased a net total of 456.4 billion yen, or 5.3 billion U.S. dollars, of Japanese debt in June, following net purchases of 735.2 billion yen in May. This was the largest purchase in records dating from 2005, according to a report released on Monday by the Ministry of Finance in Tokyo.

For the first half of the year, China bought 1.73 trillion yen, or 20.2 billion U.S. dollars, worth of debt, nearly seven times the full-year record of 253.8 billion yen, or 2.96 billion U.S. dollars, in 2005.

"China's purchase is probably a part of its efforts to hedge against a risk of the dollar's or euro's depreciation in the future," said Susumu Kato, chief economist in Tokyo at Credit Agricole CIB and CLSA. "In the long run, yen-denominated bonds will be held more broadly among Asian countries, which is positive for Japan's bond market."

Most of the bonds bought are thought to be used by the government to manage its foreign reserves.

A statement on the State Administration of Foreign Exchange (SAFE) Web site didn't comment on the Japanese bond purchases, only mentioning that its reserves include the yen as well as the dollar, euro and emerging-market currencies. SAFE said that Europe remains a key investment market for China's reserves.

The increase coincides with renewed doubts about the pace of recovery in the United States and Europe and indicates China is putting more of its ballooning foreign exchange reserves into relatively stable Japanese bonds as a result, say analysts.

Japan's risk of default is considered to be lower than euro zone countries.

By People's Daily Online