Statistics from US Department of the Treasury showed China and Japan sold US treasuries this August at a pace unprecedented in the last five years, as the US subprime mortgage crisis triggered the biggest sell-off of dollar assets since Russia's 1998 default.

 

According to the US Department of the Treasury, following a net capital influx of US$19.5 billion, US saw net sales of US$69.3 billion worth in treasuries during August alone, the highest sell-off recorded since October 2000.

 

China cut its holdings of US treasuries by 2.2 percent or US$9 billion to US$400 billion, while Japan dumped four percent of its total holdings to US$586 billion, the most since March 2000. The Chinese Taiwan's ownership of US government bonds fell sharply by 8.9 percent to US$52 billion.

 

According to latest statistics, US$400 billion of US treasuries only account for 28 percent of China's US$1.43 trillion foreign reserves now, a sharp contrast to years ago when most of China's foreign reserves found their way to US treasuries. Analysts attributed the loss of demand for US financial assets to the low exchange rate caused by subprime mortgage fallout, and the Federal Reserve's decision to lower the interest rate by 50 basic points. The dollar has devalued by some seven percent this year against the euro. Suspicions that the Federal Reserve would cut the interest rate again further contributed to pressure for China and other countries to reduce holdings of US assets.

 

In order to spend the new reserves and bolster higher returns on investments, China set up a US$200 billion fund known as China Investment Corp on September 29. China hasn't decided to allocate new reserves to the fund yet; whether the fund will be given more responsibility depends on its future performance, said fund chairman Lou Jiwei.

 

The State Administration of Foreign Exchange said in a conference that foreign exchange management departments should adopt comprehensive measures to promote a basic balance in international payments. These measures include: first, striving to meet enterprise and individual demand for foreign reserves; second, promoting convertibility of capital accounts and boosting two-way cross-border capital flows; third, reforming the RMB exchange rate formation mechanism and accelerating the development of the foreign exchange market; fourth, regulating foreign capital inflow and foreign exchange management, preventing illegal capital inflow and short-term overseas speculation to ensure the national financial security.

 

(Chinadaily.com.cn October 18, 2007)