June 11, 2009

Report: China unlikely to cut Treasuries

China, the largest creditor to the United States, was unlikely to cut its Treasury holdings as Russia might, the China Daily reported Friday.

Chinese experts told the newspaper it will not be easy for Beijing, which held nearly $768 billion of the Treasuries at the end of March, to dump the securities. Russia has announced it may cut its Treasury holdings, but the report said Chinese Vice-Foreign Minister He Yafei this week denied China was planning to dump the U.S. dollar.

China became the largest buyer of Treasuries in September, replacing Japan.

China doesn't usually make random remarks on major issues like the U.S. Treasury holdings. Once it has made an explicit promise, it keeps its word, Zhao Xijun, a financial professor with Renmin University of China, told the newspaper.

Technically, it's very difficult for China to dump its gigantic holdings easily, said Tonny Yu, a former foreign exchange trader with Bank of China. Any major sell-off move will inevitably lead to a slump in the Treasury market, eroding the remaining value of China's portfolio.

Ivan Chung, vice-president of Moody's Asia Pacific, said there are few buyers in the marketplace who could acquire China's holdings and still offer steady returns. Chung said the risks for overseas mergers and acquisition activity can be even higher if China uses its foreign exchange reserves to invest in or buy into foreign companies.

Russia is reported to hold about $120 billion in U.S. Treasuries, representing 30 percent of its foreign exchange reserves.

The China Daily report quoted experts that Russia's foreign exchange reserves have fallen sharply with the decline in the price of gold and oil, which may explain why it wants to reduce its Treasury holdings.