News Analysis: China cuts U.S. Treasuries holdings in efforts to diversify forex reserves

China's decrease in its U.S. debt holdings appeared to be in line with China's efforts to promote a market-oriented exchange rate system and diversify the use of its huge foreign exchange reserves, experts say.

Data from the U.S. Treasury Department showed that China trimmed its U.S. debt holdings for the sixth time in a row in February, dropping to 1.2237 trillion U.S. dollars. Over the past year, China cut its U.S. treasuries holdings by 49.2 billion U.S. dollars.

Although both countries unloaded U.S. debt in that month, Japan overtook China to be the biggest foreign holder of U.S. government securities for the first time in years. Over the past year, Japan added a net of 13.6 billion dollars of U.S. Treasuries.

Kent Troutman, a researcher at the Peterson Institute for International Economics (PIIE), said in an article published on the think tank's website that the pace of decumulation of U.S. Treasuries appears in line with a decrease in intervention activity by China's central bank on its foreign exchange market and a continuation of the diversification trend for its forex reserves.

A PIIE research found that China's central bank has done little or no intervening in the exchange market in the first quarter of this year. This could indicate that the central bank is serious about reducing intervention in the forex markets and moving toward a more liberated exchange rate.

Actually, at the quarterly press conference in late March, an official with China's forex regulator -- the State Administration of Foreign Exchange -- expressed clearly that China's central bank has held back chronic intervention in the forex markets over the past year, and the market force has played a bigger role in determining the Renminbi (RMB) exchange rate.

When answering questions of Xinhua, Marcus Rodlauer, deputy director of the IMF's Asia and Pacific Department, said at a press conference on Friday that the real effective RMB exchange rate appreciated by more than 10 percent in the past six months and the currency is heading towards equilibrium.

Chinese Premier Li Keqiang said late last year that China will promote the diversified operations of its forex reserves, calling on policy banks to enhance support to companies which plan to explore overseas markets.

A separate PIIE research found, over the past years, China not only increased non-U.S. dollar assets in its forex reserves, but also diversified its U.S. dollar denominated assets with gradual cuts in long-term treasury bonds while increasing allocation of U. S. dollar equities.

Troutman said, while China's central bank may not be the source of marginal demand for treasures that it used to be, as China continues to introduce ways for domestic investors to invest abroad, in the longer run China's private investors may well make up that difference and more.

China became a net capital exporter for the first time last year when outbound direct investment (ODI) outnumbered capital inflows. The ODI grew 14.1 percent year on year in 2014, sharply eclipsing the 1.7 percent growth recorded for foreign direct investment.

Troutman expected that China will continue to move forward RMB exchange rate reforms, and allow more domestic investors to diversify into foreign assets, which will help stem "endemic malinvestment." Endite