As recently revealed by the US Treasury Department, Japan overtook China as the largest holder of US treasury securities in December 2009. China sold $34.2 billion in US treasury securities in that month, which brought up some concerns about what China's unloading means and how China is going to conduct bilateral relations with the U.S. in the future.

China became the largest holder of US Treasuries in September 2008. Since then, China's increasing buying of US treasury notes has been largely due to its huge foreign exchange reserves. Unfortunately, the US financial crisis and continuing economic recession caused real panic leading China to rethink its holdings of US treasury securities. Indeed, holding US treasury notes is a double-edged sword for China. Neither buying nor selling is ideal. Thus, periodical rebalancing and structurally diversifying its foreign assets is understandable.

China is the world's largest holder of foreign reserves, but China is not yet a rich nation. China's GDP is about 25 percent of that of the United States, and its per capita GDP is only 5 percent of the US's. China's motivation for investing in US securities represents unilateral action in order to take care of its fast growing foreign reserves. Along with China's rapid growth, wealth distribution and assets management have started to challenge the Chinese central bank. Managing the fast increasing foreign exchange reserves has become a key concern of the Chinese government.

For a long time, the US dollar has been China's only choice for foreign asset investment. Since the financial crisis began, the Chinese public has voiced concerns about holding US bonds. Some Chinese scholars have suggested the government diversify its investment of foreign exchange reserves away from dollar-dominated assets, but its central bank, given its limited power and capability, was not able to do so. Facing the issue is hard; solving the issue is harder. There is no doubt that buying or selling US treasury securities has political meanings for China and the U.S. The economic interdependence of the United States and China has reached a peak level in the bilateral history. Any policy initiative from one side can become a very sensitive political matter for the other. Of course, China's continuing buying of US treasury notes contributes to its economic recovery, but a strong US economy can simultaneously support China's economic stimulation. To this end, China's holding of US treasuries could become important in balancing American strategies towards China and vice versa. If the United States presses unpleasant policies against China, China may have the choice to unload some of its US securities, but China will also have to calculate with care the loss this would incur.

China will not stop investing in the US government bonds. Firstly, the US dollar is still a reliable international currency. Secondly, the Chinese government needs a reliable place to park its huge foreign reserves, and the U.S. is still a reasonable location. Thirdly, the world economic recovery and international relations are increasingly dependant on cooperative Sino-US relations. Even though the Chinese government is entering a stage of structural change for its foreign assets, holding US government bonds is likely to continue to be of major importance. China's decision, whether it be buying or selling, will affect both nations in terms of economy and diplomatic affairs.

China is not alone in reducing its holdings of US treasury securities. According to the US Treasury Department, Russia and India also reduced their holdings in December 2009. To bring more foreign holdings back, the United States will have to show strong signs of economic recovery and effective policy initiative. The debate concerns how long it will take for the US economy to achieve full recovery, how strong the US dollar will be, and how much of the US federal budget deficit will have to be covered by foreign investment.

The author is a columnist with China.org.cn.