China needs to adjust policies that lead to more forex reserves
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Xinhua, October 24, 2011
Although China trimmed its US government securities in August by a hefty US$36.5 billion, the country remains the United States' largest foreign lender.
The cut in August, the biggest move in at least two years, reflected concerns over safety of the Treasuries as the United States was stripped of its AAA credit rating, according to analysts.
The move may suggest that policy makers in the world's fastest-growing major economy are mulling over safer ways, amid the global market turmoil and the depreciating dollar, to invest its gigantic foreign exchange reserves.
The last time China dumped US debt was in June 2009, when it pared US$25.1 billion in Treasuries. Every month, the country will buy or sell a certain, usually moderate, amount of the US government bonds.
"It's a normal investing action in the market, though it's definitely related to the fluctuation caused by the Standard & Poors' downgrade on the US in August," said Guo Tianyong, economics professor with the Central University of Finance and Economics.
Natural response
In August, credit rating company S&P lowered the United State's top-tier AAA rating for the first time since granting it. The safety of the US Treasuries has thus been put in doubt, and the greenback started to fall.
Other analysts deemed the move by China as a natural outcome of the country's efforts to optimize the investment structure of its foreign assets.
In recent years, China usually sold short-term Treasury bills to swap long-term bonds. The reduction of holdings this time might partly result from an array of short-term bills having matured, said Zhang Ming, deputy director of the Institute of World Economics and Politics under the Chinese Academy of Social Sciences (CASS).
Despite being a regular market move, the record drop of China's holdings of US Treasuries may still add to market woes, as it revealed market concerns over the "dollar trap," economists noted.
"China has run a current account surplus and a capital account surplus uninterruptedly for more than two decades. Inevitably this has led to an accumulation of foreign reserves," Yu Yongding, an economist with the CASS, wrote in an article published recently.
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