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by Lu Hui
BEIJING, Aug. 22 (Xinhuanet) – Adding to the massive holdings of U.S. debts, China purchased another 5.7 billion dollars in U.S. Treasuries in June despite growing concerns over the safety of dollar assets.
Analysts hold diversifying China's forex investments, transforming economic growth model and pushing forward RMB internationalization as the ways to manage its huge reserves and shake off overdependence on dollar in the long term.
According to the statistics released by the U.S. Treasury Department on Aug. 15, the total U.S. debts held by foreign creditors in June decreased by 16.8 billion dollars than last month, but China’s holdings increased for the fourth consecutive month, being the largest foreign creditor with around 1.17 trillion dollars.
Japan, the second-largest holder of US Treasuries, reduced its holdings by .4 billion dollars, leaving them at 911 billion dollars. Britain boosted its holdings from May's 346.8 billion dollars to 349.5 billion dollars.
Investing in U.S. debts a rational move
China has been closely watched for its investments in dollar assets, especially when the downgrade of the U.S. credit rating by Standard and Poor's from its top-notch AAA to AA-plus put the value of China’s holdings into uncertainty.
Analysts widely believe that China has few options other than to continue buying United States Treasury bonds, as the American market has long been considered the safest and most liquid bond market in the world.
As far as the size and liquidity are concerned, there is, for the time being, no substitute for the U.S.bonds in the market. The European and Japanese markets are not big or liquid enough to absorb China’s fast-accumulating foreign exchange reserves.
Therefore, investing in U.S.debts is a rational move and excessive worries over the safety of the foreign reserves are unnecessary, they agree.
Zhou Donghai from the Ministry of Finance said from the perspective of revenue maximization, investing in U.S. assets is still the safest as the prices of U.S. debts are still stable "even after the downgrade of U.S. credit rating. "
Days after the credit rating cut, U.S. treasury bond prices soared and the ten-year bond yields fell to as low as 2.33 percent in New York.
“So, from the point of view of assets allocation, it is indisputable for China to buy U.S. treasury bonds as it is in line with investment logics,” said Zhou.
Zhou's opinion was echoed by Guo Shuqing, chairman of China’s Construction Bank, who said that even if buying the U.S. debts has certain risk, but considering the severe fluctuation of global economy and debts-ridden euro zone, U.S. debts are still the best investment with the combination of safety and profitability.
Yuan Gangming, a researcher at the Center for China in the World Economy at Tsinghua University, said the purchasing of US Treasuries reflects China's limited choice regarding its 3.2 trillion dollar foreign exchange reserve.
"Increasing the holdings despite the slow economic recovery in the US and signs of looming debt problems is 'choosing the best of a bad bunch', meaning there are no better places for China to put such a large amount of money," Yuan said.
Although the US economy has been overshadowed by the rating downgrade, the country's fundamentals in the long term remain strong, Yuan added.
Talking about the consequences if China pulled back from buying treasuries, analysts warn that in that case the dollar would weaken and America’s borrowing costs would rise sharply and as a result, China’s existing holdings would get hurt.
"A large-scale sell-off of U.S. debts would cause the devaluation of China’s holdings and this is like nothing but committing suicide,” they warned.
Ma Jun, the chief economist of Greater China region of Deutsche Bank, saw that other national debt markets can not compete with the U.S. in terms of depth and liquidity, therefore lacking the capacity to hold the China’s large forex reserves.
"For instance, the scale of Germany’s national debts market is only 14 percent of that of U.S. Many euro zone countries, such as Spain and Italy, faced with much higher risk of defaults than U.S. So, buying U.S. debts is a better choice than buying euro zone debts," Ma further explained.
Ma also warned that China’s move to reduce its holdings of U.S. dollar assets would cause the panic selling throughout world market that could result in the crash of dollar exchange rate, the sharp rise of U.S. interest rate and recession of U.S. economy. "Consequently, this will cause the decline of demands for Chinese products by the OECD countries, thus battering the China’s economy itself."
