The US Treasury Department recently announced that in December 2013 China offloaded 47.8 billion US dollars of its holdings of US Treasury bonds. This is the most significant monthly reduction since December 2011. The move sparked speculation on whether China has started a major cut in its US debt holdings. Responding to this, experts said that the US debt market is an important one for China, and increasing or reducing holdings are a normal process.

Reduction is standard market conduct

According to the latest report of international capital flows released by US Treasury, in all months of last year other than June, August and December China increased its holdings of US Treasury bonds.

As of the end December 2013, China held 1.27 trillion US dollars in US government debt, 50 billon US dollars higher than at the same point in 2012. China remains the largest foreign US creditor.

Analysts think China's reduction in December was determined by the market. Due to the US exit from its quantitative easing (QE) program, investors are optimistic about the US economy, so the yields of the US Treasury bonds began to rise, and prices subsequently fell, leading to a fall in value. Japan, the second largest US creditor, also cut its US bond holdings.

Another reason was that some short-term bonds have matured. Depending on the debt repayment terms, US Treasury bonds can be divided into short-term, medium-term and long-term bonds. It is understood that China mainly cut short-term bonds in December 2013.

US debt is still a focus of investment

For some time, voices of caution have been pressing for a reduction in holdings of US debt, because of the increasing risks. Experts believe that the falling dollar will result in a fall in value of China's holding of US debt. The Fed's gradual exit from QE, and increased yields in US debt would also serve to undermine the value of the of US debt. In terms of repayment, the US government's debt dispute between the two parties gives creditors cause for concern about possible debt default.

Despite this, US debt is still cheaper than other financial assets and it is still a relatively stable and secure financial instrument for China. According to the US Treasury, although China and Japan, the two major creditors, have cut their holdings of US bonds, in December 2013 other international investors increased their holdings of US bonds by 780 billion US dollars, pushing total foreign holdings of US bonds to 5.79 trillion US dollars, the highest level in history.

For the time being, US debt remains the best alternative for China. Goldberg, US strategist at TD Securities believes that China will remain a long-term supporter of the US Treasury market, because China needs a highly liquid market to channel its massive dollar reserves.

According to some foreign media outlets, there is little possibility that China will make a substantial cut in its holdings of US government bonds. If this did happen, the move would not only raise long-term borrowing costs for consumers and businesses, and damage the interests of the U.S, but also cause the value of China's own holdings of US bonds to shrink dramatically.

However, experts also believe that in the future China's foreign exchange reserves cannot be limited to US debt, which has rising potential risks, and China should actively seek new investment opportunities.

The article is edited and translated from 《中国会否大规模减持美债（热点聚焦)》, source: People's Daily Overseas Edition, author: Luo Lan.