China cuts US bond holdings, signal less reliance on US dollars

Chinese mainland's purchase of US Treasury bonds fell for the first time in 11 months to $763.5 billion in April, latest US government data showed on Monday.

Data from the US Treasury showed China cut its stake in Treasury bonds by $4.4 billion, to $763.5 billion, as of the end of April compared with March.

It is unclear whether the reduction will continue because the amount is so small, but the cut signals caution of governments or institutions toward US Treasury bonds, Zhang Bin, researcher with the Institute of World Economics and Politics of the Chinese Academy of Social Sciences, a government think tank.

He added that the weakening US dollar posed a threat to the holdings of US Treasury bonds.

The US government began to increase currency supply through purchases of Treasury bonds and other bonds in March, which raised concern among investors about the creditworthiness of US Treasury bonds. The move also dented investor confidence in the US dollar and dollar-linked assets.

China, the biggest holder of US Treasury bonds, is highly exposed. In March, Premier Wen Jiabao called on the United States to guarantee the safety of China's assets.

US Treasury Secretary Timothy Geithner traveled to Beijing about two weeks ago to reassure Chinese leaders, saying their money is very safe despite the US budget deficit, which he pledged to cut.

Leaders of the emerging countries called a new world order less dependent on the United States for a stable and predictable currency system in Russia at BRIC’s first annual summit.

President Dmitry Medvedev of Russia told a news conference that existing reserve currencies, including the U.S. dollar, had not performed their function and said it was time for change. Countries should use their national currencies more for trade, he added.

The dollar fell 0.9 percent against a basket of major currencies on world markets after Medvedev's comments. The slide underlines the likely sensitivity of the FX market to comments emerging from today's meeting, analysts at Barclays wrote.

Yuanlong Wang, researcher with the Bank of China, said the root of the problem was the years of trade surpluses, which created the huge amount of foreign exchange reserves in China. It left China's assets tethered to the US dollar, he said.

He said making the Renminbi a global currency would cut China's demand for the US dollar and reduce its proportion in the trade surplus.

China is not the only nation that trimmed holdings of US Treasury bonds in April: Japan, Russian and Brazil did likewise, to reduce their reliance on the US dollar.