China Continues Boosting Holdings of U.S. Treasuries
China added $5.7 billion of U.S. Treasuries in June despite growing pressure to diversify foreign reserves away from the beleaguered dollar in the face of growing fears over the perceived U.S. debt crisis.
China’s holdings totaled $1.17 trillion as of the end of June as the U.S. Congress was wrangling over the terms of a debt-ceiling extension.
It was the third consecutive month in which China increased holdings of U.S. Treasury debt after adding $7.6 billion in April and $7.3 billion in May, according to the U.S. Department of Treasury.
Meanwhile Japan, U.S.‘s second-largest foreign creditor, cut its holdings by $1.4 billion in June to a total of $911 billion. Number three foreign creditor Britain boosted holdings from $346.8 billion in May to $349.5 billion in June.
Buying U.S. treasures in the face of mounting concerns over the nation’s political and economic uncertainties is a matter of picking “the best of a bad bunch”, according to Yuan Gangming, a researcher at the Center for China in the World Economy at Tsinghua University. There are simply no completely safe investments for China’s $3.2 trillion in foreign exchange reserves.
Yuan felt the U.S. ratings downgrade by Standard & Poor’s doesn’t change the U.S. economy’s strong fundamentals.
“What really matters is the proportion of China’s newly increased US dollar assets (including Treasury bonds) to the newly increased foreign exchange reserves,” said Ken Peng, senior China economist with BNP Paribas. “Though there is no way to get the figure, we estimate that the proportion is gradually dropping.”
The best way to permanently address China’s foreign reserves dilemma is to achieve a trade balance, says Peng.
“If the country’s foreign exchange reserves continue to grow at a fast pace, there is little chance of getting out of the cycle,” Peng said. “You have to do something with the accumulated dollars.”
China’s surging exports produced a July trade surplus of $31.5 billion, the highest in more than two years.
Even those who feel China’ should diversify its foreign reserves away from the dollar admit there isn’t much that can be done at the moment. Alternatives like gold and the Euro offer only partial and temporary relief, say analysts. Other alternatives that may provide better long-term diversification strategies include buying struggling firms in the U.S. and Europe to profit from an eventual recovery.
