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BEIJING: China slashed its holdings of United States Treasury debt in June by the largest amount in nearly nine years - its latest move to diversify its massive reserves away from US-dollar bonds.
The news, widely reported on Tuesday in local media, attracted an outpouring of approval from Chinese analysts and netizens alike, who said it was high time that China cut its reliance on buying American debt.
As the US' largest creditor, China has been stuck in a co-dependent relationship. It finds it has to keep buying US Treasuries in order to keep the American economy - and its own economy - out of trouble.
However, according to a US Treasury Department report on Monday, China's holdings of US Treasuries fell for the first time this year by US$25.1 billion (S$36.4 billion) - or 3 per cent - to US$776.4 billion at the end of June.
This represented the biggest drop in the value of China's holdings since a 4.2 per cent cut in October 2000.
Beijing's surprise move to reduce its holdings was greeted enthusiastically by the locals. Within six hours of the news being posted on popular forum 163.com, well over 600 responses, largely supporting China's latest move, had flooded the website.
'Finally came to their senses! It's about time,' said one netizen on another website, Chinanews.com.cn
For now, Beijing's greater concern is the spreading out of its US$2 trillion worth of reserves across different assets including commodities, gold and equities, said Professor Mei Jun of Renmin University of China.
This is to placate the public at home who fear that China's huge Treasury holdings may plummet in value if the US dollar falls or inflation climbs in a still-wobbly US economy.
Top officials, including Premier Wen Jiabao, have stated in recent months that China will look to use its reserves for other investments, such as funding overseas expansion by local companies.
But while pressure at home may have been a factor in Beijing's decision to start paring down its Treasury holdings, some Chinese scholars noted that its inter-dependent relationship with the US is still the key consideration in the way Beijing deploys its reserves.
The impact of China's large net sale of US Treasuries on the market is expected to be minimal, unless the slide continues for the next few months.
However, China will be careful not to make drastic cuts in its US Treasury holdings currently, amid concern that such a move may trigger a loss of investor confidence in the US Treasury market, said a Beijing international finance scholar.
'This may spark panic selling and push up bond yields, hurting the value of China's investments. It may also give a negative vibe to the US, which needs China to continue buying its Treasuries to help fund its economic stimulus package,' he said.
Other analysts suspect that China is still struggling to find good safe haven alternatives to US Treasuries in which to park its fresh reserves. So it may still be forced to clandestinely raise its Treasury holdings without upsetting public opinion at home.
Standard Chartered economists Stephen Green and Jinny Yan suggested that China actually raised its Treasury holdings in June - through purchases via intermediaries such as brokers in London.
Such purchases would not show up under China's name, but are instead classified under Britain, they said in a report on Tuesday.
'We suspect...that if the managers of China's foreign exchange reserves wanted to confuse the market about their activities, booking large orders through London would be an obvious tool to use,' they said.
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