China in move to cut holdings of US Treasuries

China cut its holdings of US Treasuries in August to a six-month low, but still remains the largest foreign creditor, US Treasury Department data showed Tuesday.

China reduced its holdings by $11.2 billion to $1.268 trillion in August, when the Obama administration warned Congress that the US could default on its debts in October if the lawmakers did not lift the debt ceiling in a timely manner.

Fitch Ratings warned on October 15 that it might cut the sovereign rating of the US from AAA, citing concerns over the increasing risk of a US default.

Standard & Poor's Ratings Services lowered its US sovereign rating to AA+ during a previous debt ceiling impasse in August 2011.

The US Congress passed a bill on October 16 to raise the country's debt ceiling until February 7, 2014.

"The last-minute agreement does not solve the fundamental problem. It may happen again three months later," Li Daokui, an economist and former central bank advisor, wrote in his Weibo on October 17.

Li suggested that foreign investors including China should cut their holdings of US Treasuries.

The expected pullback by the Federal Reserve from its quantitative easing program, or QE 3, represents good timing for China to adjust its investment portfolio by reducing US Treasuries holdings and increasing investment in American blue chip stocks, Zhang Ming, a research fellow at the Chinese Academy of Social Sciences, told the Global Times Wednesday.

The dollar's value and long-term interest rate are expected to rise after the US pullback from QE3, which will have a bigger impact on fixed-income assets such as government bonds than on the stock market, he said.

"As long as China is the world's largest holder of foreign exchange reserves, it could hardly avoid investment in US government bonds," he wrote in his blog Wednesday.

China's foreign exchange reserves hit $3.66 trillion in September, an increase of $351 billion over December 2012.

Market driven exchange and interest rates, gradual opening of China's capital account and use of foreign reserves to support outbound direct investment will help reduce accumulation of the reserves, Zhang wrote.