Beijing says it will keep buying US debt

Beijing says it will keep buying US debt
By Jamil Anderlini in Beijing
Copyright The Financial Times Limited 2010
Published: March 9 2010 05:36 | Last updated: March 9 2010 15:20
http://www.ft.com/cms/s/0/bd0d0d24-2b39-11df-9d96-00144feabdc0.html


China does not want to politicise its purchases of US Treasury bonds and continues to buy Treasuries “every day”, according to the official in charge of managing China’s $2,400bn foreign exchange reserves.

Chinese investments in US Treasuries are “market investment behaviour and we don’t wish to politicise them,” Yi Gang, director of the State Administration of Foreign Exchange (Safe), said on Tuesday in Beijing. “We are a responsible investor and in the process of these investments we can definitely achieve a mutually beneficial result.”

China is the biggest foreign holder of US Treasury bonds and senior Beijing officials have voiced fears that US economic policies would see the value of the dollar suffer.

The composition of China’s reserves is a state secret but the apparent decline in Beijing’s direct holdings of US Treasuries in recent months has led to speculation that it may be deliberately cutting its holdings in retaliation for worsening US-China relations.

But analysts say the monthly Treasury data that show a dip in Chinese Treasury holdings don’t capture the extent of Safe’s purchases through international banks and overseas financial centres such as London and Hong Kong.

When the data are revised at the end of the second quarter China is likely to have continued purchasing US Treasuries although it may have allowed some short-term debt to mature as it buys more long-term US government securities.

Analysts said if China had been dumping dollars there would be much more volatility in US bond markets and traders would notice large sell-offs and corresponding purchases of other foreign assets.

No other market outside the US and Euro government bond market is big enough to absorb a large-scale diversification of the world’s largest foreign exchange reserves without serious volatility.

“The US Treasury market is the biggest bond market in the world and our foreign exchange reserves are relatively large so as you can imagine the US Treasury market is an important one for us,” Mr Yi said yesterday. “Buying and selling US government bonds is something our investment team does every day and is completely normal.”

Mr Yi’s soothing comments come after months of deteriorating US-China relations that have seen unusually harsh public disputes break out over US arms sales to Taiwan, disagreements at the Copenhagen climate change summit, a meeting between President Obama and the Dalai Lama and US criticism of China’s internet controls and human rights record.

Despite the secrecy surrounding China’s reserves around two thirds are invested in US dollar-denominated assets, according to analysts and people who work closely with Safe.

Despite the financial crisis and Safe’s ill-timed 2008 diversification into global equities, Mr Yi said his agency had achieved “relatively good” returns from its management of the reserves over the last two years.

In a sign of how closely China’s reserve management is watched around the world, the price of gold fell $3 in the hour following Mr Yi’s comments after he said China would be “cautious” about adding more gold to its foreign exchange reserves and gold would never become a big part of Safe’s portfolio.

He pointed out that any large gold purchases by China would quickly push up the gold prices in international markets.

China is the world’s biggest gold producer and Safe has been quietly adding to its gold holdings by buying from state-owned domestic producers, raising its total from 600 tonnes in 2003 to 1,054 tonnes by the middle of last year.