China has diversified its huge pool of foreign reserves by cutting US Treasury bond holdings and increasing Japanese debt holdings.

The nation reduced US treasury bond exposure by nearly US$24 billion in June, down 2.7 percent from May, according to US government data.

During May, China's holdings of US debt dropped US$32.5 billion after hitting a yearly high of US$900.2 billion in April.

According to data released by the US Treasury Department on Monday, by the end of June, China held nearly $843.7 billion worth of US debt, US$94.6 billion less than the peak of US$938.3 billion it held in September 2009. Despite the cuts, China is still the largest US debt holder, followed by Japan and the United Kingdom.

As the nation trimmed its US exposure, it has been expanding its Japanese debt buys. According to data, China has purchased US$20 billion worth of Japanese treasury debt for six consecutive months, almost five times the total new increases of its holdings during the past five years.

During the first half of 2010, China bought 1.73 trillion yen (US$20 billion) worth of Japanese debt, nearly seven times the full-year record of 253.8 billion yen in 2005, according to Japan's finance ministry.

Analysts said the moves reflect the clear intention of the nation to further diversify investment of its US$2.45 trillion foreign reserves. The possibility of buying more debt from other Asian countries and those who conduct renminbi cross-border settlements with China are also increasing, they said.

Chen Daofu, an economist with the Development Research Center of the State Council, said China would continue to adjust its holdings of US debt, but it is hard to predict whether it would continue to reduce the holdings in the coming months.

"It all depends on how the economic situation in the US unfolds and how other nations recover," he said.

Chen said although European and emerging market debt buys are options for China, they cannot match the strength of US debt in foreign reserves over the short term.

"Actually, the decision makers know that the yields from US debt are questionable, but it's hard to find any other investment channel that is good enough."

Zhang Monan, a researcher with the State Information Center, said the nation's choice of debt to park its foreign reserves is something between "bad and worse".

"Economic development driven by debt in these nations are not sustainable and risks brought by the unstable world economy have been increasing," she said.

Zhang said the government should invest in the real economy overseas, instead of treasury debt, especially in strategic or emerging industries like energy and high technology.

US government data also showed that Japan continued to be the second largest foreign holder of US debt, followed by the UK.

Japan held US$803.6 billion worth of treasury bonds in June, higher than the US$786.7 billion in May, while Britain held US$362.2 billion in US bonds, up from US$350 billion, according to the US data.

(China Daily August 18, 2010)