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China increases US treasury holdings
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China increased its holdings of US treasury securities by US$65.9 billion in October, consolidating its place as the No 1 holder of American debt, according to the Treasury's latest report on international capital flows.

It was China's largest monthly increase this year, pushing the country's total holdings to US$652.9 billion, compared with US$587 billion at the end of September, when it replaced Japan to become the top holder of US debt.

The continual increases in US debt holdings in recent months have triggered fierce domestic debate, as the country has channeled almost a third of its US$2 trillion of foreign exchange reserves into US treasury securities.

Wei Weixian, economist with the University of International Business and Economics, believes it "is a fairly acceptable option".

With US treasuries recently gaining investor favor, their yields have been on the decline; but in the long term, they are still a relatively safe investment for China, Wei said.

"Despite the financial crisis, the US economy remains the strongest, providing back-up for the treasury securities," he added.

He also pointed out that China does not have many options to deploy its massive amounts of foreign exchange reserves.

For example, China pulled US$200 billion out of its foreign exchange reserves to set up China Investment Corporation (CIC) to diversify investment, but CIC has incurred heavy losses in its investment in the US private equity firm Blackstone due to the tumbling international financial markets. CIC has since said it would be more cautious in investment abroad.

Guo Tianyong, economist with the Central University of Finance and Economics, also believes the US treasury debt has relatively low risks and good liquidity.

Moreover, it is not out of the realm of belief that Beijing and Washington may have reached a tacit consensus that China helps stabilize the American markets by increasing the purchases of US securities, Guo said.

Opponents of the rising purchases of US securities cite the possibility that Washington may be financially unable to pay back the money in the future, as it has to issue a lot more debt to finance its ailing financial markets.

As China piles up more US debt, it would also be a problem to sell it later as sales would affect returns on its existing dollar assets, analysts said.

Japan remained the second largest holder with a total of US$585.5 billion, up by US$12.3 billion in October. The UK is third with US$360 billion.

US Treasury data show that net foreign purchases of long-term US securities in October decreased by US$34.8 billion while foreign holdings of dollar-denominated US securities, including treasury bills and other custody liabilities, increased US$92.4 billion.

International investors have opted to cut holdings of long-term debt while increasing short-term holdings, the data shows, which analysts ascribe to long-term economic uncertainties in the US.

In another development, central bank governor Zhou Xiaochuan said yesterday that more interest rates cuts may be possible this month as economic indicators in November pointed to a weakening national economy. "From now until the beginning of next year, there is pressure on interest rate cuts," he said in Hong Kong.

(China Daily December 17, 2008)

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