China's holdings of US treasury bonds passed the $800 billion mark to reach $801.5 billion, the highest in the world, after the country purchased $38 billion in May, according to the International Capital System report issued by the US Treasury yesterday.

Japan, the second-ranked holder, cut its holdings by $8.7 billion to $677.2 in May. Meanwhile, the UK increased its holdings by $11 billion putting it in fifth place. The Caribbean countries kept third place with a cut of $9.9 billion. The oil exporting countries follow them with an increase of $3.4 billion.

Purchasing US treasury bonds is a practical choice for China, despite the risk of dollar devaluation, according to Li Yang, director of the Institute of Financial and Banking at the Chinese Academy of Social Sciences. "It's better to choose the less of the two evils," he said.

Since the outbreak of the global financial crisis, the current international monetary system has come under fierce criticism. The dominant position of the dollar has been shaken. However, the performance of the Japanese yen, pound and euro has been weaker than that of the dollar, and there is a long way to go before China's Renminbi becomes an international currency. The dollar's position as international reserve currency has not yet been seriously threatened, and the international monetary system will not change in the short term, according to most analysts.

China adjusts structure of its holdings

Despite the increase in its overall holdings of US T-Bonds, China is adjusting the structure of its holdings, said Li Yang. It has been selling long-term bonds and buying lower-risk short-term bonds in recent months.

But China is increasing holdings of other, higher-risk US assets. Data from the US Treasury Department show that China's holdings of medium and long-term US corporate bonds rose continually throughout 2008, apart from August and September, although growth was slower in the second half of the year. China also continued to buy US stocks from last September through December, with an increase of $184 million in December, 160 percent up on November.

China significantly increased its holdings of US government agency bonds in the first half of 2008. From last July, however, it changed the strategy completely and began to continuously sell its holdings. According to research conducted by Brad Setser, a fellow of the US Council of Foreign Relations, last November China sold long-term US government agency bonds worth a total of $3.1 billion and reduced holdings of short-term bonds by $5 billion.

Adjusting the structure of China's foreign exchange reserves has become a top priority since the global financial crisis began. Another attractive option is IMF bonds.

At the beginning of July 2009, the International Monetary Fund (IMF) approved a plan to issue SDR-denominated bonds worth a total of US$150 billion to its 186 member countries and their central banks. China, Brazil and Russia showed great interest in the measure, and China plans to buy US$50 billion of the IMF bonds.

Experts said the IMF bonds are a new option for China's investment of its foreign exchange reserves as it diversifies away from US T-Bonds.

(China.org.cn by Li Shen and Li Xiao July 17, 2009)