China overtakes Japan as top foreign creditor to the US

Armed with a massive $1.95 trillion in foreign exchange reserves, China increased its holding in the US treasury by $14.3 billion, bringing its total holdings in US treasury bonds to $696.2 in December, from $681.9 billion in November.

By increasing its holdings in US treasuries last year by 46 per cent, China surpassed Japan as the US' biggest foreign creditor in September.

However, the additional US debt holdings have worried financial analysts in China who fear that the country will lose a substantial amount of foreign exchange reserves if the US treasury prices collapse in the near future.

Releasing the latest debt holding figures, Fang Shangpu the deputy director at the State Administration for Foreign Exchange, said at a press conference in Beijing yesterday, ''We hope countries whose currencies are the main holdings in our international reserves will take effective measures to cope with the financial crisis and they should work to maintain economic and financial stability, and protect the interests and confidence of investors.''

With the 10-year Treasury yields climbing to 44 basis points, primarily on rumours that the US government will borrow more to finance the $787 billion stimulus package, the government bond have also yielded a 14 per cent return, which includes reinvestment interest and price gains.

Fang said that China would base its decision on whether to buy and how much to buy US treasuries solely on its needs and follow the principle of value preservation and safety.

"By the end of 2008, the national foreign exchange reserve assets on the whole were kept safe and we provided abundant liquidity for the country to cope with the crisis and at the same time we also made some profits," he added.

SAFE, which manages China's foreign exchange reserves said in a statement given to reporters ahead of the news conference that China would ensure that its $1.95 trillion in foreign exchange reserves would stand as a wall against the current global financial meltdown.

SAFE also said that it will conduct coordinate with different government agencies to get their input on ways to effectively utilize China's foreign exchange reserves.

It also said that it will use its huge forex reserves by investing locally as well as increase imports and it would ease some of the laws for companies investing abroad.

But some economist have warned the Chinese authorities of putting all their eggs in the US treasury basket as currently the US interest rates are at near-zero levels and the US dollar may slide, in spite of its recent upward but it may not sustain in the near future.

Despite these fears, international investors have relied on the US treasury for their investments and have removed vast amounts of money from banks and dumped it the US market as a recent report showed that net capital inflows into the US rose to $74 billion in December from $61.3 billion in the previous month and foreign holdings of dollar-denominated short-term US securities, including treasury bills, increased $2.1 billion in December.

The report also said that investment in long-term US securities reached $22.4 billion in December compared with a net selling of securities worth $37.6 billion in November showing the treasuries are a safer bet for investment compared to other financial products in the current global economic turmoil.