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Bonds still good value for China

By Zhang Ran (China Daily)
Updated: 2009-06-17 07:38

China's reduced holding of US Treasury bonds reflects its desire to maximize profits but in no way means the nation lacks confidence in the securities, experts said following Beijing's cut of $4.4 billion of the bonds.

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US Treasury bonds are an important part of China's foreign currency reserve investment because they are comparatively safe, with the US financial market the largest in the world and highly liquid, they said.

China held $763.5 billion of US Treasury bonds at the end of April, down by $4.4 billion from the previous month's total of $767.9 billion, according to information released by the US Treasury on Monday.

It was the first time China had decreased its US Treasury bond holdings since February 2008.

"A breakdown of the selling of the $4.4 billion in Treasury bonds reveals that there was no cut to medium- and long-term Treasury bonds, which indicates China still has confidence in such securities in the long-run, despite a coming inflation risk under the US' quantitative monetary policy," said Li Jianfeng, economist with Shanghai Securities.

According to Bloomberg data, despite the $4.4 billion cut in short-term holdings, China purchased $17.426 billion medium- and long-term bonds in April. China sold $7.099 billion of those bonds, which meant the nation made a net purchase of $10.327 billion of them in April.

"The $4.4 billion cut was to short-term bond holdings. Technically, it was reasonable because the price of short-term bonds rose in April, which offered a good opportunity to take profits from the market," Li said.

The yield of one-year US Treasury bonds was 0.49 percent at the end of April, Shanghai-based Wind data shows.

China may have used money made from the sale to buy special drawing rights, a quasi-currency used by the International Monetary Fund (IMF). Its value is calculated from a basket of major currencies, said Liu Zhijing, an analyst with China Galaxy Securities.

The State Administration of Foreign Exchange, which manages nearly $2 trillion in foreign reserves, said earlier this month it was willing to buy as much as $50 billion in bonds issued by the IMF.

Ma Jun, China chief economist with Deutsche Bank, suggested China should shift some of its foreign exchange investment from US Treasury bonds to equities, considering the looming inflation risk.

But analysts said that considering the huge foreign exchange reserves, US Treasury bonds are the option.