China slashes proportion of foreign reserves held in $US assets

CHINA has made a sharp shift away from purchases of US securities, slashing the dollar's share of the country's foreign reserves in what may signal a change in strategy for managing the massive cash pile, Dow Jones calculations indicate.

The portion of China's reserves parked in the US appears to have sunk to a decade low of 54 per cent as of end-June from 65 per cent in 2010 and 74 per cent in 2006, according to the Dow Jones calculations. The calculations are based on data on China's holdings of US securities from an annual US Treasury survey, and China's own data on the value of its FX reserves.

The exact allocation of China's $US3.2 trillion ($2.96 trillion) reserves - by far the world's biggest war chest - has always been a mystery. But the Treasury survey provides the best guide as to how much the State Administration of Foreign Exchange - the organisation charged with managing those reserves - has invested in dollar assets.

Given the size of China's reserves, and the growing global importance of the world's second-biggest economy, Beijing's allocation of its reserves is both a key political issue and a potentially huge factor for foreign-exchange and sovereign debt markets.

The US data show China's holdings of US securities edged up $US115 billion on year to $US1.726 billion at the end of June, but this equates to a much smaller share of the total as China's reserves were growing rapidly during the period. The purchases of US securities equalled just 15 per cent of the growth in China's reserves, a substantial fall from 45 per cent in 2010 and an average of 63 per cent over the last five years.

Calculating the dollar's share in the allocation of flows into China's reserves is complicated by the impact of currency movements on the value of China's reserves. But even accounting for valuation effects, the downshift in dollar purchases appears pronounced.

The new numbers lend credibility to hints from Chinese and European government officials over the last two years that Beijing is ramping up its purchases of European sovereign debt. In February, speaking at the EU-China summit Premier Wen Jiabao said: "Europe is a main investment destination for China to diversify its foreign exchange reserves."

As the eurozone crisis rumbles on, it suggests that funds from China's reserves could be a critical factor in keeping a lid on rising bond yields in the debt-ridden eurozone periphery, and in funding Europe's bailout facilities.

Analysts caution that the US data need to be taken with a grain of salt. The Treasury International Capital system collects data on millions of records to calculate foreign holdings of US. securities. But correcting for biases in the data, in particular correctly identifying country ownership of securities held in custody in third countries, is difficult. Typically the result of this bias is to underestimate China's holdings of Treasurys.


The Australian