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China may be mulling Treasuries slowdown, but options limited


By Ranasinghe and David Lawder

LONDON/(Reuters) - Chinese officials reviewing the country's vast foreign exchange holdings have recommended slowing or halting purchases of amid a less attractive market for them and rising U.S.-trade tensions, reported on Wednesday.

The report sent yields to 10-month highs and sent the dollar lower. Economists cautioned, however, that would not be able to make large changes to the composition of its reserves as it needs them to manage its renminbi exchange rate.

has the world's biggest currency reserves, approximately $3 trillion, and is the biggest foreign holder of U.S. debt, with $1.19 trillion in Treasuries as of October 2017, according to data from the Treasury Department.

(GRAPHIC: U.S. Treasuries top foreign holders, click

The report, which cited people familiar with the matter without identifying their seniority or input into the report, quoted the sources as saying the market for U.S. is becoming less attractive relative to other assets. They also cited trade tensions with the as a reason to slow Treasury purchases, the report said.

said the Chinese officials did not specify why trade tensions would cause a cutback in Treasuries purchases.

David Malpass, speaking to reporters in Brussels, dismissed any concerns about China's demand for U.S. Treasuries.

"The market is a deep, robust market within the world and so we are confident that our economy, with the economy strengthening, that it will remain a deep, robust market," Malpass said when asked to comment on the report.

Malpass, who heads international affairs for Treasury, also reiterated his concerns about China's emphasis on its state-owned enterprises and subsidies that distort capital allocation.

(GRAPHIC: Chinese ownership of U.S. Treasuries, click


did not immediately respond to a faxed request for comment on the report. The People's Bank of could also not be reached for comment outside business hours.

Major bond yields extended earlier gains after the report. The yield on 10-year hit a 10-month high of 2.59 percent in European trade and was up 4 basis points on the day. That pushed the dollar to a six-week low against the Japanese yen.

Wall Street's major indexes pared earlier losses on Wednesday as higher U.S. bond yields drove gains for banks and other financial stocks.

But some economists noted that had already eased Treasury holdings and would not be able to more aggressively reduce holdings without hurting its portfolio, given its need for stable and liquid dollar assets.

"There aren't many places you can stick that money," said Paul Ashworth, at in

uses its holdings of foreign currency to keep its currency at the rate where it wants it, and given this desire for stability, there might not be much room for manoeuvre on the composition of its reserves.

But Ashworth noted that the move could serve as a warning that could quickly shift U.S. borrowing costs higher if the started a trade war with

The administration is considering several new tariff moves in the coming weeks, including broad restrictions on and aluminium imports and punitive actions against arising from an investigation into Beijing's intellectual property practices.

The report comes amid increasing nervousness about bond weakness after the said on Tuesday it will trim its purchases of Japanese bonds, raising speculation it will reduce its monetary stimulus this year.

"People were already jittery about Treasuries," said Aaron Kohli, an at in New York, noting is "piling on."

(Reporting by Ranasinghe, Tommy Wilkes, Saikat Chatterjee, in London; Karen Brettell and Saqib Ahmed in New York; David Lawder, Jason Lange and David Chance in and Jan Strupczewski in Brussels; Writing by Frances Kerry; Editing by and Nick Zieminski)

(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)

First Published: Thu, January 11 2018. 00:32 IST