China has increased the US Treasury bond holdings in its $ 2.648 trillion of forex reserves, even as it seeks to diversify its foreign exchange basket.
The world's biggest holder of US debt, China's investment in US Treasury bonds climbed to $ 868.4 billion in August, up by $ 21.7 billion from July, according to the US Treasury Department data released on Monday.
This was the second straight month that China increased its holdings of US Treasury bonds, but the total amount is still below the September 2009 peak of $ 938.3 billion.
"The monthly change in China's US Treasury bond holdings is simply an investment decision based on expectations of the short-term economic outlook and yields of different financial assets," said Wang Tao, chief China economist at UBS Securities.
"It does not necessarily mean that China has stopped diversifying its foreign exchange reserves away from investing in US assets," the official told China Daily.
China became a major buyer of Japanese and South Korean debt earlier this year, besides Euro.
But its' net purchases of US Treasury bonds in the last two months and the sale of Japanese bonds in August have sparked speculation that faced with an uncertain global economic outlook, the country has suspended diversifying its $ 2.45 trillion foreign reserves.
After months of record net purchases, China cut its Japanese debt holdings by a net 2.02 trillion yen ($ 24.5 billion) in August-- the biggest single-month sale since 2005.
"In the long run, China should try to reduce the share of dollar assets in its total foreign exchange reserves steadily and that might not lead to a massive sale of US Treasuries, as China's foreign exchange reserve is still rising," Wang said.
During a recent visit to Europe, Premier Wen Jiabao expressed interest in buying Greek bonds. Economists tell diversifying the country's colossal foreign exchange reserves on the debts of countries with strong trade ties to China is also a good choice.
Overall, global investors' enthusiasm for US debt has returned recently.
Net purchases of Treasuries rose to $ 117.1 billion in August, up from $ 30 billion in July, representing the biggest buying of US government debt since last November.
"When the economic outlook remains uncertain, risk aversion sentiment sweeps the global market. Investors tend to choose less risky assets for stable returns," Zhao Xijun, a finance professor at Renmin University of China said.
