China's reductions in its US Treasury holdings are not a strategic cut, but are instead small, tactical adjustments based on market conditions, a Chinese foreign exchange regulatory official said on Thursday. US Treasuries are very important for international investors and central banks around the world due to the debt market's rating, depth and liquidity conditions, the official told reporters in Beijing.
"Sometimes we expect Treasury prices to rise, sometimes we expect Treasury prices to drop. The market should not over-interpret whether China's Treasury reduction is strategic. Definitely not," the official said. "We will make some small, tactical adjustments in US Treasuries in a very dynamic way based on market principles." China's foreign exchange reserves fell far more than expected in November, by $69.06 billion to $3.052 trillion, the lowest level in nearly six years.
The reserves could be influenced by several factors, including changes in China's international balance of payments. "Our international balance of payments are relatively safe and sound," the official said. "The size of foreign exchange reserves of $3 trillion is still relatively ample."
China was dethroned by Japan as the largest holder of US government debt in November, as the Chinese central bank has dipped into its foreign exchange reserves to support the yuan. In October, China's holdings of US Treasuries fell by $41.3 billion to $1.115 trillion.
Investors are paying close attention to declines in China's holding of US Treasuries as any sharp sell-off could add further upward pressure to US interest rates, which in turn can undermine the Chinese currency. The yield of the 10-year Treasury was little changed following the remarks. As the yuan has fallen, overseas investments by Chinese firms have come under scrutiny as a channel for illegitimate outflows.
China's outbound investment in November rose 76.5 percent from a year earlier to $15.7 billion. Growth of China's outbound direct investment has been fast this year, another official at the State Administration of Foreign Exchange (SAFE) said at the briefing on Thursday. China needs to take "counter-cyclical" steps to control large capital outflows, said the official. The authorities can keep the yuan basically stable, central bank chief economist Ma Jun said at the same briefing, as optimism about the US dollar may be overdone.