According to US Treasury data known as TIC data (Treasury International Capital System), in May China increased its US debt holdings slightly by $7.7 billion, and currently holds nearly $1.271 trillion, meaning China is still the largest foreign owner of US debt.

China had cut its holdings of US Treasury bonds in three consecutive months, and this is the first time that it has increased its holdings of US debt this year.

U.S. debt should be the largest component in our country's foreign exchange reserves, and this is unlikely to change in the foreseeable future. It is decided by the U.S. position in global financial markets. Currently, there is no other international financial market in which China's huge foreign exchange reserves can invest and give it sufficient liquidity, said Mei Yuxin, a researcher at the Chinese Academy of International Trade and Economic Cooperation under the Ministry of Commerce.

Mei also said the increased holdings of US debt also show investors are optimistic about the U.S. economic recovery.

According to Xu Hongcai, an economist with the China Center for International Economic Exchanges, since the second half of last year, the U.S. economy has experienced a relatively strong recovery, and as a whole, the situation of the U.S. fiscal balance has improved. In addition, structural reforms have achieved some positive results. An increase in holdings of U.S. debt at this time shows investors’ confidence in the U.S. economic recovery.

Whether we should increase or decrease US debt holdings in the future will depend on the rate of return, according to Mei.

On the premise of protecting safety and liquidity, foreign exchange reserves management should strive to improve the return on investment. More foreign exchange reserves should be directed to support the development of China’s economic entities, local governments, and enterprises "going global", and actively participate in foreign direct investment.

Experts said that under the current context of weak global economic recovery, to protect its foreign exchange reserves against the risk of depreciation China needs to carry out reform of its industrial structure, trade policy and exchange rate policy. In particular, China should adjust its unbalanced industrial structure in order to achieve balanced foreign trade and financial items as soon as possible.

The article is edited and translated from《中国年内为何首次增持美债》, source: People's Daily Overseas Edition, author: Zhao Pengfei