Experts: China may further cut its U.S. debt holdings

China may continue to cut its U.S. debt holdings amid global worries over shrinking liquidity and safety risk of the assets and the country's ramped-up efforts to diversify its foreign exchange reserves, experts said on Thursday after reviewing the latest data from the U.S. Treasury Department.

U.S. data showed that China, the second-biggest foreign holder of U.S. Treasury securities, cut its holdings for five consecutive months to August to $805.4 billion, just shy of the existing low of $801.5 billion reached in May 2009.

China slashed its holdings at a time when both Japan and the United Kingdom — the largest and third-largest foreign holders of U.S. debt, respectively — increased them. Japan increased its U.S. debt holdings by $3.7 billion to nearly $1.12 trillion and the UK by $35.7 billion to $698.1 billion.

"Part of the reason (behind China's moves) is the horrific performance of U.S. Treasury bonds in the past three years," said Hong Hao, chief economist at GROW Investment Group. From the peak period to now, the prices of U.S. longer-term bonds have plunged by roughly 50 percent, Hong said.

"Other reasons are related to how China has become more sophisticated in foreign exchange reserve management. There is an allocation toward agency bonds with higher yields, and China has allocated more resources for the Belt and Road Initiative," Hong said.

Experts said there is a supply-demand mismatch in U.S. Treasuries, making the U.S. debt outlook more worrying.

"U.S. debt faces huge pressures of being sold off, due to the increasingly large supply of U.S. Treasuries, the possible deadlock of the Democratic Party and the Republican Party on new year spending levels, and the U.S. Federal Reserve's tapering of monetary stimulus," said Wang Youxin, a senior researcher at Bank of China.

"Besides, against the background of rising geopolitical conflicts, holding too much of dollar-denominated assets could mean higher exposure to geopolitical risks.

"Reducing holdings of U.S. debt while increasing holdings of strategic resources like gold and crude oil will increase safety of assets for China."

China, Wang said, is expected to continue to diversify its asset holdings to improve asset safety and profitability.

Experts also warned that the abuse of the dollar's hegemony status by the United States has severely damaged global trust in the greenback, leading to an irreversible trend of de-dollarization in the world.

Yang Haiping, a researcher at the Institute of Securities and Futures, which is part of the Central University of Finance and Economics, said reduced Chinese holdings of U.S. debt became necessary to protect asset safety against the background of the global trend of de-dollarization and the increasing presence of the renminbi in cross-border settlements.

Besides, uncertainties in China-U.S. relations and the high U.S. fiscal deficit also justify the reduction in Chinese holdings of U.S. debt, he said.