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Why China slashed its US debt holdings

By Liu Min, Wang Yu and Ren Feng (Jiefang Daily)

16:23, October 24, 2011

Edited and Translated by People's Daily Online

China cut its holdings of U.S. government debt by 36.5 billion U.S. dollars in August, which was the first decrease after four consecutive months of increases and also the biggest one-month decline in recent years, according to statistics issued by the U.S. Treasury this week. China now holds more 1.1 trillion U.S. dollars of U.S. government debt.

"Over the past few months, U.S. Treasury yields have been steadily dropping, and Treasury prices have been rising. Given the relatively good prices, it is reasonable and efficient for China to sell part of its U.S. dollar assets," said Ding Zhijie, a professor at the School of Banking and Finance under the University of International Business and Economics.

Yuan Gangming, an expert on international finance at the Chinese Academy of Social Sciences, said that the central banks of major economies have all been reducing their holdings of U.S. government debt in recent weeks.

However, Yuan said China's reduction in its U.S. debt holdings is just a minor adjustment to its foreign exchange reserves. There are no signs that China is reducing its holdings of U.S. debt in a systematic and steady way, he said.

Worried about safety of dollar assets?

Certain experts said that the reduction in U.S. debt holdings has reflected China's foreign exchange regulator's worries about the long-term depreciation of the U.S. dollar and its eagerness to get out of the "dollar trap."

"U.S. dollar assets make up nearly 70 percent of China's 3.2 trillion U.S. dollars of foreign exchange reserves, and the European and U.S. debt crises have exposed the risks of such an imbalanced reserves structure. China is 'kidnapped' by U.S. debt and needs to change the situation as soon as possible," Yuan said.

Although economists generally believe that the possibility of the U.S. sovereign debt default is very low, their discussions about the risks from U.S. sovereign debt default have never ended.

"Currently, the U.S. public debt burden is becoming heavier, and the United States' desire to alleviate its debt by various means, such as depreciating the U.S. dollar, is strengthening," Cheng Fengying said. "If the United States prints the U.S. dollar quietly, it will lighten its debt burden, but China's foreign exchange reserves will obviously be devalued."

To a certain extent, that is why China reduced the amount of U.S. Treasury securities it holds. Ding said, "Selling the U.S. Treasury securities and observing the situation is an option for China in the current economic situation."

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Leave your comment3 comments

  1. Name

Chinhomiah at 2011-10-31175.156.74.*
It is obvious that investing overseas has its risks, such as currency, economic, political and arbitrary. The American decision to take the easy way out by simply printing more money is a clear indication that the risks have now moved into the political and arbitrary realm. Instead of investing so much overseas, China should invest in its own stock markets and companies. It is conservatively estimated that within the next 15 to 20 years, China's economy will surpass that of America and, along with this, China's stock markets and bluechips will increase tremendously in market capitalisation and value. China's various investment arms should buy into quality companies within the limits permitted by law and stock market regulations. These state investment arms would then periodically distribute shares of these companies to the people of China. Imagine how happy the people will be when they receive Bank of China or Construction Bank shares once in every few years. The manner in which the people are to be allowed to convert their shares to cash, or whether they have to hold them for a certain length of time, is something that can be further discussed and fine-tuned. Slowly China will become a nation of shareholders, people with a stake in the system and appreciative of what the Chinese Communist Party is doing to improve their lives. Such a development would also be in keeping with the Marxian philosophy of making the people the true owners of the nation's wealth, rather than the current practice of only a few fortunate urban dwellers having the means of owning equity in public listed companies..
helen at 2011-10-25203.82.92.*
Why must China needs to explain its foreign reserves management? It's time to desist from such practices since China does not need to answer to its foreign debtors.China does not need to elucidate and apologise to anybody nor does Chinese leaders need to entertain discussions with foreign leaders and their media on the internal affairs of China. It shames us Chinese to see this habit continuing ....
Pan Asian at 2011-10-24220.255.2.*
The urgency of China to reduce its holdings on the greenbacks is of utmost priority. Uncle Sam, in fact is the guilty currency manipulator with rounds of quantitative easing.

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