Graphics: GT
Treasury securities to remain important part of China's total reserves, experts say
China continued to cut its holdings of U.S. Treasury securities in January, but U.S. debt assets will remain an important part of the country's foreign exchange reserves, experts said on Wednesday
China held $1.24 trillion worth of U.S. Treasury securities as of the end of January, the lowest level since February 2015 and down $8.2 billion from December 2015, according to the monthly Treasury International Capital (TIC) report released by the U.S. Department of the Treasury on Tuesday.
Although it was the fifth consecutive month that China's holdings of U.S. Treasury securities decreased, the country remained the largest overseas holder of those instruments in January.
Also in January, total foreign holdings of U.S. Treasury securities amounted to $6.18 trillion, up from $6.14 trillion in the previous month, the TIC report showed. Japan had the second-largest holdings, with $1.12 trillion in January, up $900 million from the end of December 2015.
According to Tan Yaling, head of the China Forex Investment Research Institute, two factors may explain the reduction in Chinese holdings of U.S. debt in January.
"First, some of the holdings may have matured and China didn't buy more to replace them during that month; also, it is normal for the country to adjust its holdings based on its needs or market changes," Tan told the Global Times on Wednesday.
While there were media reports that China sold some of its foreign exchange reserves to support the yuan, it is hard to say whether that led to the decline in its January holdings of U.S. Treasury securities this year, Zhu Tian, professor of economics at the China Europe International Business School, told the Global Times on Wednesday.
Zhu also noted that China's January holdings of U.S. debt were little changed from a year earlier, showing that those instruments remained the biggest part of the country's foreign exchange reserves.
China's foreign exchange reserves dropped by $99.5 billion from the end of December 2015 to $3.23 trillion at the end of January, but they were still the world's largest, the People's Bank of China, the central bank, said in February. U.S. Treasury debt accounted for nearly 40 percent of China's foreign reserves in January.
"Although there have always been calls to diversify China's foreign exchange reserves, it should be pointed out that U.S. Treasury securities remain the safest assets for governments holding huge amounts of reserves," Tan said. "We should not over-interpret the implications of a monthly change, as it cannot precisely reflect the big picture."
The TIC report also showed that foreign governments and central banks sold $57.2 billion worth of long-term U.S. Treasury debt in January, a record high, exceeding the previous month's $48.1 billion.
"As the U.S. enters the Fed's interest rate hiking cycle this year, the dollar is expected to strengthen and some countries may have sold U.S. debt in exchange for dollar liquidity," Tan said. "Meanwhile, as many countries and regions are facing their own economic difficulties, it also makes sense for them to raise more dollars through such sales to support their economies and markets."
