China has reclaimed the position as the biggest foreign holder of U.S. sovereign debt after boosting its holding for a fifth consecutive month with a strengthened yuan and eased capital outflow pressures.
The country purchased $44.3 billion of U.S. treasury bonds in June, the most in six years, bringing its total holding to $1.147 trillion, according to data released on Tuesday by the U.S. Treasury Department.
China ceded the position to Japan as the biggest foreign lender to the U.S. government last October as the country had spent a portion of its massive foreign exchange reserves to stem the depreciation of the yuan and to curb capital outflows.
With solid economic growth, a stabilizing currency and improved investor confidence, the country has seen the steady rebound of its foreign exchange reserves, which stood at $3.08 trillion in July, official data showed. More than one-third of the reserves are invested in U.S. treasury bonds.
Analysts expect that China may continue to increase holdings of U.S. treasury bonds in the coming months and see moderate growth in its foreign exchange reserves given its trade surplus with Washington and eased capital outflow pressure.
Donna Kwok, a senior economist at UBS Investment Bank, said that effective cross-border capital flow management, the weakness of the U.S. dollar and improved onshore sentiment bolstered by a better domestic growth outlook have helped stop the decline of China's foreign exchange reserves.
China has tightened its scrutiny of outbound mergers and acquisitions by Chinese companies to curb speculation and manage capital outflows. It has also further opened its financial markets including launching a bond trading link between the mainland and Hong Kong to attract more inbound capital from overseas investors.
Given the general tone on financial risk prevention by China's top policymakers, Kwok expected the government to maintain its tight management of capital outflows while adopting measures that encourage capital inflows to support longer-term objectives, including further capital market opening and the Belt and Road Initiative.
Cheng Shi, chief economist at ICBC International, said that China's increased holding of U.S. treasury bonds showed that dollar-denominated assets remain a liquid and safe option for Beijing to manage its foreign exchange reserves.
Cheng added that maintaining ample foreign exchange reserves will help boost international investors' confidence in the yuan.
The Chinese currency has gained nearly 4 percent against the U.S. dollar this year after declining about 7 percent last year.
"The trend of a stabilizing yuan is likely to remain, which will reduce the pressure on capital outflows and support the rebound of China's foreign exchange reserves in the long run," Cheng said.
