China reduces holdings of U.S. government bonds

China has made the first annual reduction in its holdings of U.S. Treasury bonds in a decade. Experts are viewing the move as a sign that the country is accelerating the move away from dollar assets in search of more diversified investment channels.

According to the latest monthly figures from the U.S. Treasury Department, China's holdings of U.S. Treasury bonds dropped for a fifth consecutive month in Dec to 1.15 trillion U.S. dollars.

The number was an update of a figure released in February, after the U.S. department adjusted its method of collecting data on foreign holdings of U.S. government bonds, a move aimed at obtaining more information about the use of proxies buying and holding U.S. securities.

As a result, China's June holdings of U.S. Treasury securities have been amended to 1.31 trillion dollars instead of 1.17 trillion dollars. The figure at the end of 2011 was 51 billion dollars higher than the previous calculation.

According to the revised data, China cut its holdings of U.S. debt by 8.2 billion dollars in 2011 compared with the previous year. It was the first time that the country had reduced its yearly holdings since 2001.

The country remains the largest foreign holder of U.S. treasuries, but analysts suggest that China's 3.2 trillion dollars in foreign-exchange reserves means that the country is beginning to rapidly diversify its portfolio of foreign currencies.

Senior Chinese officials, including the central bank governor Zhou Xiaochuan, have repeatedly emphasized the importance of diversification of China's foreign-exchange reserves to minimize the negative impact of fluctuations in the international financial markets.

The latest figure "clearly indicates China's intention not to put all its eggs in one basket", said Lu Feng, director of Peking University's China Macroeconomic Research Center, according to quotes in the Wall Street Journal.

"The Chinese government has reiterated that it will be actively involved in supporting the troubled euro area. With China's holdings of U.S. debt declining, plans for Europe may be already in progress," said Shen Jianguang, chief Asia-Pacific economist with Mizuho Securities Co Ltd.

The reduction of dollar assets coupled with the ambitions in the eurozone can be interpreted as an important step by Chinese foreign-exchange regulators to promote the diversification of reserves, Shen said.

China has many reasons to reduce its exposure to the U.S. dollar, such as low yields and the monetary-easing measures adopted by the U.S. government, which could lead to inflation that could erode the value of those holdings, said Wei Liang, a researcher with the China Institute of Contemporary International Relations.

The increasing volume of outbound investment may also have indirectly affected the amount of money invested in U.S. debt, Wei said.

"U.S. debt has been a safe haven for capital amid the global economic crisis, but as we see growth come back on track, investors may pull out in favor of other investment channels," he said.