Rise in US Treasury position 'due to eurozone worries'

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The rise in China's holdings of US Treasury bonds in February was a result of concerns over the eurozone, but the nation's stance on diversifying foreign exchange reserves hasn't changed, experts said.

According to the monthly Treasury International Capital report on the US agency's website, posted on Monday, China lifted its position in US Treasury securities in February by $12.7 billion, or 1.1 percent, to $1.18 trillion.

According to the report, foreign investors were net buyers in February of US long-term financial assets. But the buying pace slowed to $10.1 billion during the month, compared with net purchases of $102.4 billion in January.

Japan, the second-largest foreign holder of US Treasuries, has been increasing purchases aggressively. Its holdings rose for the eighth consecutive month in February, expanding $13.1 billion to a record $1.1 trillion, as the Asian nation sought to curb the yen's appreciation against the dollar.

The gain in China's holdings was the second monthly rise in a row, after an overall reduction of $163 billion in the second half of 2011. The increase in US Treasury holdings came as China's trade surplus continues to shrink this year, having an overall quarterly trade surplus of just $900 million.

Mei Xinyu, a senior researcher at the Ministry of Commerce, said the $12.7 billion increase in US Treasury holdings should not be considered as a net increment but a "reconstruction" of the foreign reserves that involved shifting some investment in euro-denominated debt to US Treasuries.

Mei said the repayment ability of the issuers of the euro-denominated bonds will be in line with economic growth in the eurozone, which, judging from current conditions, will be a risky business if large-scale holdings are involved.

"The US, on the other hand, has a much better decision-making capability and efficiency as a single nation," he said.

The borrowing costs of major European economies such as Spain and Italy touched new highs this week as the euro crisis reignited, driving investors to seek a safe haven such as US Treasuries.

In comparison, the US economy showed positive signals such as faster-than-expected growth in retail sales and the lowest unemployment rate in three years.

The adjustment suggested that the US is in a better position than Europe, Mei said, adding that China's overall increase in euro-denominated assets was more a result of direct investment by companies, rather than the government's foreign exchange investment portfolio.

However, the move does not signal an alteration of China's strategy for diversifying its foreign exchange reserves, Mei said.

According to data from the People's Bank of China, the balance of the country's foreign exchange reserve account rebounded to $3.3 trillion after a $20.6 billion decrease in the last quarter of 2011.

The figure was up $260.3 billion, or 8.5 percent, year-on-year and up $123.9 billion quarter-on-quarter, which was interpreted by analysts as an appreciation of the non-dollar assets, which accounted for about one-third of the portfolio.

China also bought 651 billion yen ($8.1 billion) of short-term Japanese bonds in February, the largest purchase since May 2010.

Yi Gang, head of the State Administration of Foreign Exchange, said in a recent forum that China's adequate foreign exchange reserves have been beneficial in helping the country withstand the impact of the global financial crisis.

"But it's not a 'the more, the better' situation in foreign exchange reserve management, as we compare the marginal cost and marginal efficiency," Yi said.