"Considering the prospect of long-term depreciation of the US dollar and pessimism on the asset value of investments in US treasury bonds, the Chinese government intentionally trimmed down its holdings to ensure the security of Chinese foreign assets," said Xu Qiyuan, a researcher with the Global Economy and Politics Research Institute of the Chinese Academy of Social Sciences (CASS).
"China is speeding up its strategy of diversifying its foreign investments," he added.
Regarding the specific reason for the reduction, Zhang Ming, deputy director of the International Financial Research Center of CASS, said it might be that long-term securities had reached maturity and China was not willing to continue holding them, and had not compensated by increasing its stake in short-term treasury debt, leading to an overall decrease in holdings.
In April, China also cut its holdings of US treasury debt by 4.4 billion. Experts predicted that if China continued to enjoy a trade surplus but without better channels for investment, it would have to increase its stake in US Treasury securities. In May, China increased its holdings to US$801.5 billion, a growth of US$38 billion in a single month, the highest monthly increase since last October.
By the end of June, China's foreign exchange reserves reached US$2.13 trillion, a new historical peak. In June alone, foreign exchange reserves saw an increase of US$42.1 billion.
But the buying power of China's foreign exchange reserves has shrunk despite the fact that the total keeps on mounting up. A research report from CASS concludes that, from 2000 to early 2009, the buying power of China's forex shrank by 50 percent and that the country urgently needs to find a way to preserve and increase the value of the assets.
"In the long-term perspective, US debt is obviously not an ideal option," Xu said.
Zhang Ming pointed out that since early this year, state-owned enterprises and China Investment Corporation (CIC), a sovereign wealth fund, had tried many different approaches to investing foreign exchange, some of which achieved good results. "But one month’s data is not enough to indicate that reducing holdings has become a trend," Zhang said.
It is noticeable that China had a different approach from other countries. In May, when most countries reduced their holdings, China increased its holdings by US$38 billion. In June, when China reduced its holdings, other countries started to increase their stakes.
Japan, the second-largest holder of US Treasury securities, increased its holdings to $711.8 billion in June from US$677.2 billion in May. The United Kingdom, the third largest holder, also increased its holdings to US$214 billion in June from US$163.8 billion, a surge of 30.6 percent.
In the top 10 holders of the US Treasury securities, only Russia, now holding US$119.9 billion, had the same strategy as China. It cut its holdings for the third consecutive month, but only by US$4.6 billion.
