China continues to trim its US debt to avoid risks

China, the biggest foreign holder of US debt has trimmed its portfolio to $1.15 trillion to diversify its foreign reserve portfolio to avoid risks.

China reduced its US Treasuries portfolio by $5.4 billion to $1.15 trillion in January, according to the data released by the US Treasury Department on Wednesday. It is the third straight month of net selling after China's holdings of US debt reached a peak of nearly $1.18 trillion in October 2010.

The $5.4 billion cut in China's holdings doesn't seem large by itself, but when China's ever-growing foreign exchange reserves are taken into account it translates into a sharp decline in the proportion of US debt in China's foreign exchange investment portfolio, said Lu Zhengwei, chief economist at Industrial Bank.

The holdings of $1.15 trillion accounted for about 40 percent of China's total of $2.85 trillion in foreign exchange reserves by the end of 2010, the highest figure worldwide. "The continued selling is in line with China's plan to diversify its huge amount of foreign exchange reserves away from investing in US assets to avoid risks," Lu told state run China Daily.

"Though holdings might fluctuate based on short-term market conditions from a long-term point of view, the proportion is set to go down," he said. Earlier Yu Yongding, a former adviser to the Chinese central bank, said China fears that that the US may reach its congressionally-mandated debt limit of $14.3 trillion in a few months, which in turn could lead to a default and advised China to stop buying US treasury bonds.

However, Xia Bin, senior economist and counsellor to the State Council, told China Daily last year that Beijing will not "dump" its holdings of US Treasuries because the move would cause chaos in both the global economy and international markets. Xia's line was echoed by Wang Jianwen, chief economist with Southwest Securities.

"China's investment portfolio will be spread proportionately across its major trading partners in the future to counter trade imbalances. In the long term, China's holdings of Japanese and euro debt will grow in proportion to the portfolio," Wang said.

He also said that China's sale of Japanese debt last year was "an investment decision based on expectations of the short-term economic outlook".

China sold net 37.4 billion yens ($460 million) of Japanese national debt and net 430.4 billion yen of money-market instruments in 2010.