Wednesday 25 July 2012

US Treasury bonds still China's best choice


US Treasury bonds still China's best choice
(People's Daily Online)08:07, July 24, 2012
 
According to U.S. Treasury Department, China is still the biggest holder of the U.S. debts. It increased holdings of U.S. Treasury bonds of $ 5.2 billion in May, pushing the gross holding to 1.17 trillion U.S. dollars. Its data show that China had increased 25.6 billion U.S. dollars for two straight months.

There is no best choice

Risk aversion in the market and the upward trend of U.S. dollar make investors choose it.
Mei Xinyu, a researcher with Department of Commerce, said China maintained surplus in the international balance of payments, so a big proportion of the increased foreign exchange income will be turned into foreign exchange reserves.

Since mid-March, the U.S. dollar has shown an evident upward trend, which naturally attracted market participants. In China's foreign exchange reserves up to trillions of dollars in the foreign exchange reserves, to increase the investment in U.S. debts is feasible, Mei said.


Talking about the reasons for China's holdings of U.S. debts, Li Ruoyu, Senior Economist with the State Information Center said the U.S. Treasury bonds has become China’s choice because of their safety, liquidity and profitability.

Although the United States is also in the financial crisis, but relative to other countries, it adjusted and responded promptly. We do not have the best choice, only the second best option, said Li.
Gary Locke, U.S. Ambassador to China, recently said that U.S. Treasury bonds are safe assets as President Obama and the U.S. Congress has developed policies to guarantee the U.S. fiscal credibility.

Gold is another option

The State Administration of Foreign Exchange has not been very active for gold reserves. Although some economists believe that China should increase its gold reserves, China’s gold reserves only account for 1.6 percent in its foreign exchange reserves.

According to a ranking released by the World Gold Council on July 9, the Chinese reserve of gold was 1054.1 tons, ranking sixth in the world. The ratio of gold reserves to foreign reserve was the lowest in the top 20 countries.

In this regard, Mei Yuxin said he is in favor of increasing the gold reserves, but does not agree with increasing gold holdings significantly.

"The increase in gold reserves should be made at the right time. We should buy when the price hits bottom," Mei said.

Li believes that the holdings of gold can optimize asset allocation, and can appreciate, but there are also drawbacks. Buying large amount of gold will push the price of gold high, but there is no place to sell so much gold.

Do not put all the eggs in one basket

Since last year, State Administration of Foreign Exchange has repeatedly stressed that taking into account the huge holding of U.S. debts, foreign exchange reserves investment should be diversified, so as to avoid the risks brought by foreign exchange devaluation.

"In addition to the purchase of U.S. debts, we can also buy some European bonds and Japanese bonds. We should not put all eggs in one basket,” Li suggested.

He said China should control growth in foreign exchange reserves, adjust the foreign exchange policy to achieve the balance of international payments and turn foreign exchange assets into real assets.
Since the debt investment incomes are generally lower than equity investments, the industry generally recommends that the future should not only reduce the proportion of U.S. debt in foreign exchange reserves investment, but also to reduce the proportion of the debt investment in the foreign exchange investment.

Experts said that despite holding U.S. Treasury bonds has certain risks, in the volatility of the global economy, the U.S. debt is almost the products that best combines safety and profitability.

Source: People's Daily Overseas Edition, Author: Cao Jiali and Liu Minwen

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