China continues increasing holdings of US treasury bonds
Even though China is becoming the No. 1 holder of US bonds, it is still likely to continue increasing holdings of US treasury bonds because it is the best way to deploy its $1.9 trillion foreign exchange reserves, economists say.
According to US treasury data on Monday, China has taken Japan’s place to become the top holder of US treasury debt in September. Its overall holdings amounted to $585 billion, increased $43.6 billion in September, while Japan cut it holdings from $586 billion to $573 billion in August.
The total amount of net foreign purchases of long-term US securities reached $66.2 billion in September, which rose from $21 billion in August and $18.4billion in July.
According to analysts, treasury data shows the US is still a better place for foreign investment in such a crumbling world market. “That’s why China has increased its holdings,” said Dong Yuping, senior economist at the Institute of Finance and Banking affiliated to the Chinese Academy of Social Science.
Washington now badly needs capital to fund its massive market rescue plan as the US financial crisis worsens. However, some domestic economists don’t keep a positive attitude toward China’s using foreign exchange reserves to purchase US bonds because they are afraid of the huge losses it may incur.
“But China may not have many options,” Dong said. Although suffered significant blow during the crisis, the US economy remains the largest and strongest; besides, Japan and the EU could not challenge the preeminence of the US yet. Therefore, investment in dollar assets carries the least risk, he said.
“China and the US are in the same boat,” he said. If China reduces its holdings of US debt, other countries may probably follow suit. That will cause the weakening of the dollar and depreciation of dollar-dominated assets which will severely hurt China’s interests.
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