MNI: Diversified FX Reserves Means Less USTs - PBOC Official

--China Holding Less U.S. Treasuries Inevitable

--Returns On U.S. Treasuries Under Pressure

     BEIJING (MNI) - China's restated objective of diversifying the makeup of

its foreign exchange stockpiles can be seen as an admission that it is cutting

back on U.S. Treasury purchases, a senior official at the People's Bank of China

confirmed to Market News. 

     "Diversifying the forex reserves means that holding less U.S. Treasuries is

inevitable," the source said on Thursday.

     Earlier today, the State Administration of Foreign Exchange, China's FX

manager and a division within the central bank, commented in a

question-and-answer statement on media reports that China is considering

reducing or halting buying U.S. Treasury.  

     "We also got the news through some media reports," SAFE said. "In our

opinion, the news may have quoted the wrong source of information, or it may be

false news." It's worth noting that SAFE used the word "may," instead of a flat

denial. 

     The comments from SAFE followed a story published by Bloomberg News

Wednesday.

--PLURALISM AND DIVERSIFICATION

     SAFE added it has "always conducted investment management in accordance

with the principle of pluralism and diversification, so as to ensure the overall

safety of foreign exchange assets and maintain and increase their value."

     While that may sound like a standard answer, repeating its previous

positions on the matter, in this case it may be interpreted as an assertion.

     "China invests its FX reserves in U.S. Treasuries in accordance with market

conditions and its investment needs, and its FX managers are responsible

investors," SAFE added. 

--CLOSELY GUARDED SECRET

     How the PBOC manages the world's largest forex stockpiles is a closely

guarded secret, and the regulator has never outlined its management strategy.

China International Capital Corporation (CICC), a state-owned investment bank,

estimated in 2016 that U.S. dollar-denominated assets accounted for 66.7% of the

portfolio, slightly higher than the 63.6% average typically seen in other global

forex reserves.

     Chinese analysts and officials have been saying for years that the PBOC

should diversify away from low-yield U.S. government bonds and seek higher

returns. Of course, holding U.S. government debt also carries political

implications and is not a simple matter of economics. China, the biggest holder

of U.S. debt, is also its biggest trading partner and accounts for its largest

share of the trade deficit.

     MNI's source didn't discuss whether the diversification is political, as

some have speculated. 

     The yield on the 10-year U.S. government bond currently stands at 2.5440%,

compared with the 3.9500% interest on China's sovereign.

     "Returns from investing in U.S. Treasuries are under pressure, given rising

interest rates around the world," Ming Ming, a former PBOC official and now

chief economist with CITIC Securities, told MNI. "U.S Treasury yields would have

to rise if the market expects better U.S economic performance," he said.

--MNI Beijing Bureau; +86 (10) 8532 5998; email: marissa.wang@marketnews.com

--MNI Beijing Bureau; +86 10 8532 5998; email: william.bi@mni-news.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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