China resorts to biggest cut of US debt, sheds $36.5 bn

China divested $36.5 billion or 3.1% of its holding in the US treasuries in August, its biggest sell-off of dollar assets since 2000.

The move came as a surprise as China had bought over bonds worth $8 billion weeks before that.

Downgrade of US credit ratings by Standards & Poor’s, in early August, had created a major crisis of confidence over US treasuries all over the world.

The August move was the biggest sell-off of dollar assets by Beijing despite surge in foreign demand for US financial assets as investors sought a safe heaven amid the European Debt crisis, state run China Daily reported.

China, Washington’s biggest creditor, holds $1.137 trillion of US treasury debt.

The August reduction was the first time that China had trimmed its US debt holding in five months. It had made a net purchase of $8 billion in July, to show its confidence in US debt even as America struggled with its financial troubles.

While some analysts said that the reduction was an indication that China has adjusted its foreign investment portfolio in view of the down grade of US debt, others argued that the sell off does not necessarily mean that China has lost faith in the US dollar.

Tan Yaling, president of the China Forex Investment Research Institute, told the Chinese "Global Times" that part of China's holdings of US government securities might have become due in August, but that did not mean US treasuries have lost their advantage or there had been a turning point in China's policy.

A commentary by influential government newspaper, the People's Daily said that holding US securities is not the best option, but a practical one under the current situation.

The paper said China should promote the diversification of its foreign exchange reserves in a timely fashion.

In a possible move to dilute its over-investment in US securities, Beijing was reportedly in talks with Rome for a possible purchase of Italian debt, as the latter is engulfed in the euro-zone debt crisis.

Chinese representatives in the G-20 were also reported to have indicated last week that Beijing was willing to pump billions of dollars into the problematic euro-zone to purchase infrastructure assets and sovereign debts.

Zha Xiaogang, a researcher at the Shanghai Institute for International Studies said that compared with other investments, US treasuries are still a safe haven.

"China is unlikely to increase its purchase of euro assets before Europe takes action to rein in its plaguing debt problem. Even if they do buy the bonds, the amount will have more of a symbolic meaning," Zha said.

A recently released data by People's Bank of China showed that China holds about $3.2 trillion in total foreign exchange reserves, the largest in the world.