China won't dump US Treasury securities

Jul 8, 2010

BEIJING: China yesterday ruled out the 'nuclear' option of dumping its vast holdings of United States Treasury securities but called on Washington to be a responsible guardian of the dollar.
In the third in a series of statements explaining its work to the Chinese public, the State Administration of Foreign Exchange (Safe) sought to allay concerns in the outside world that arise whenever Beijing shifts its holdings of US government debt.
'Any increase or decrease in our holdings of US Treasuries is a normal investment operation,' said Safe, the arm of the central bank that manages China's official currency reserves.
It said it constantly adjusts its portfolio to maximise returns, and any changes to its US Treasury portfolio should be seen in that light and not interpreted politically.
In a series of questions and answers posted on its website, Safe asked rhetorically whether China would use its US$2.45 trillion (S$3.4 trillion) stockpile of reserves, the world's largest, as a 'nuclear weapon'.
Safe said such concerns were completely unwarranted.
'The US Treasury market is the world's largest government bond market, and US Treasury bonds deliver good security, liquidity and market depth with low transaction costs.
'The US Treasury market is a very important market for China,' the agency said.
China held US$900.2 billion in US Treasuries at the end of April, according to US Treasury data released on June 15. Bankers say China's total holdings of dollar-denominated assets are much greater, accounting for perhaps two-thirds of its reserves.
Safe also gave a qualified vote of confidence to the dollar. It acknowledged that financial markets were very concerned at one point that massive US government borrowing would drive the American currency lower.
But it said economic conditions elsewhere were also a factor in determining the dollar's trend. The euro zone, for instance, was struggling with high government debt levels.
One of the prime concerns of Chinese Internet commentators is that a long-term decline in the dollar or euro will erode the value of Safe's portfolio.
To that end, Safe called on the US and other major countries to take 'responsible measures' to maintain the value of their currencies. This meant withdrawing monetary stimulus in a reasonable manner and relying less on deficit spending.
Safe was lukewarm about gold as an investment. 'It cannot become a main channel for investing our foreign exchange reserves,' the agency said