China may reduce its U.S. debt holdings

China may continue to reduce the share of U.S. debt in its overall foreign exchange reserves amid its ramped-up efforts to diversify foreign asset portfolios, experts said on 20th of March.

In the short term, factors like changes in monetary policies by the United States and Japan may create more opportunities for profit from transactions in U.S. Treasury bonds, leaving a reasonable range of fluctuations in China's holdings of the U.S. assets, they said.

Their comments came as the latest data from the U.S. Treasury Department showed that China, the second-biggest foreign holder of U.S. Treasury securities, cut its holdings by $18.6 billion to $797.7 billion as of the end of January from December.

Since April 2022, China's holdings of U.S. Treasury bonds have always been below $1 trillion.

Tang Yao, an associate professor of applied economics at Peking University's Guanghua School of Management, said that China will likely increase holdings of gold and other assets to further diversify its foreign exchange reserves, therefore ensuring safety and stability of its foreign exchange reserve market.

"In the long run, if there is no major change in China-U.S. relations, I believe China's holdings of U.S. debt will likely be kept around $800 billion. As its holdings of other foreign assets are expected to increase, the weight of U.S. debt in China's overall foreign assets will likely decline," Tang said.

"However, considering opportunities of trading U.S. treasury bonds created by macroeconomic factors such as the paths of the monetary policy of the U.S. and Japan, professionals at China's central bank might be instructed to buy and sell the U.S. treasury bonds from time to time. Such trades would result in temporary increases or reductions in its holdings of the assets."

On Tuesday, the Bank of Japan announced its decision to end negative interest rates, marking a major shift from years of unprecedented monetary easing.

At a two-day monetary policy meeting that began on Monday, the BOJ announced its first benchmark rate hike in 17 years, guiding overnight lending rates to 0 percent to 0.1 percent, up a fraction from minus 0.1 percent to 0 percent. The bank also decided to end its yield curve control policy.

"These changes are symbolic of the normalization of the BOJ's monetary policy away from an unconventional ultra-easing stance," said Kyohei Morita, chief Japan economist at Nomura Securities, in a research report.

Nomura analysts hold a view that Japan's inflation based on the core consumer price index will remain above 2 percent year-on-year toward the middle of 2025.

"We remain of the view that the BOJ will make an additional rate hike by raising the target of the unsecured overnight call from the current range of 0.0-0.1 percent to 0.25 percent in October 2024," Morita said.

Tokyo-based Minmetals Japan Corp, a subsidiary of Minmetals Development Co, does business in the Japanese yen while trilateral trade is settled in U.S. dollars.

"Considering the widespread expectations for the yen to appreciate, some Chinese companies in Japan are likely to convert a portion of their dollar assets into yen assets," said Zhang Shuo, president of Minmetals Japan.

"We hope to obtain professional guidance and financial instruments from banks in areas such as settlements involving the Japanese yen, the U.S. dollar and the Chinese yuan, to help us maximize our corporate profits."