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--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
[TOPICS: M$A$$$,M$Q$$$,M$U$$$]
MNI London Bureau | +44 203-865-3812 | les.commons@marketnews.com