China Increases Holdings of US Debt

China, the biggest foreign creditor of the United States, increased its holdings of US Treasury bills to US$1.17 trillion in November, up US$200 million from the previous month, the Treasury Department disclosed on Wednesday.

According to the department's monthly Treasury International Capital report, November saw a rebound in foreign demand for US bonds despite concerns over unresolved fiscal-policy debates in Washington.

Foreign investors bought a net total of US$26.4 billion of Treasury notes and bonds during the month, more than double the US$12 billion in net purchases recorded for October.

China's holdings shrank from the US$1.25 trillion high reached in November 2011, continuing a pattern of decline through much of last year.

Yao Wei, a Hong Kong-based economist with French bank Societe Generale SA who monitors China, said even with the modest increase in November, China will still try to diversify its foreign interests and lower the share of US Treasuries in its total foreign investments.

Lou Jiwei, chairman and CEO of China Investment Corp, the sovereign wealth fund, said that while China will continue to buy US government debt, the return on its investment doesn't look promising. "It is a very difficult decision," he said.

Lou, a former vice-minister of finance, manages CIC's US$410 billion in assets. He said US Treasurys are "still a safe asset right now, but you have to pay a big price to buy such safe assets", referring to continued low interest rates in the US.

"If you don't buy them, your risk-aversion capability will be affected, but if you do, then the returns won't be very good," Lou said at the Asian Financial Forum in Hong Kong this week.

As the Chinese currency is still expected to appreciate against the US dollar, the risk in holding Treasuries is likely to increase in the coming year, according to analysts.

The yuan rose 0.25 percent during the past year to 6.2855 at the close on Dec 31. It touched a 19-year high of 6.2216 on Jan 9, according to the China Foreign Exchange Trade System.

"Investment in US government debt is unavoidable, as dollar-dominated assets still generate good returns compared with assets denominated by other main currencies," said Qu Hongbin, the chief China economist with the HSBC.

"The State Administration of Foreign Exchange is looking for better channels to diversify foreign reserves, and I am not worried about the investment," Qu said.

David Bloom, the global head of FX strategy, HSBC, said, "this year, we expect a very small appreciation in the yuan's value, but there will be very big changes about how the currency operates with the promoting of the internationalization process."