China trimmed its holdings of US Treasury bonds for a fifth month in a row in March, lowering the amount of those assets to $1.145 trillion, according to data released by the US Treasury Department on Monday.
The biggest buyer of US Treasury debt cut the amount of its holdings by $9.2 billion, less than 1 percent of the total it possesses, a month after it had unloaded $600 million worth of the bonds.
Throughout the same period, China bought long-term Japanese treasury bonds worth 234.5 billion yen ($2.9 billion), the biggest purchase of debt China has made within a single month in more than six years.
"The central bank is continuing its strategy of diversifying the $3 trillion it holds in foreign exchange reserves," said Lin Songli, an economist at Guosen Securities Co Ltd.
He said China's decision to diversify its assets is reasonable. To protect itself from financial troubles, the country should invest in a variety of foreign currencies to reduce the risks inherent in holding such a large an amount of foreign exchange reserves.
"But diversification will be difficult because there are few alternatives (to US Treasury debt)," said Lin, predicting China will not continue to cut its holdings of US debt in the coming months.
The Wall Street Journal cited David Ader, an analyst at CRT Capital, as saying that it seems as if the US Treasury debt the country is selling is scheduled to mature soon.
Ader said China, meanwhile, is taking on more exposure to debt with longer maturity dates - debt issued by Fannie Mae, Freddie Mac and other government-sponsored enterprises - and only slightly cutting its holdings of longer-dated Treasuries.
Concerns have arisen that the United States may default on its debt, especially since US President Barack Obama said a failure to raise the nation's $14.3 trillion debt limit by early August might disrupt the world financial system and plunge the US into another recession.
On Sunday, Timothy Geithner, the US Treasury Secretary, said that he has used accounting measures to extend the deadline until August 2, according to Bloomberg.
In April, Standard & Poor's, a prominent credit rating agency, lowered its long-term outlook on US credit from "stable" to "negative".
Zhang Jianhua, head of research at the People's Bank of China, said concerns that the heavily indebted US government might default could drive Treasury yields higher and cause US debt prices to fluctuate, but demand for Treasuries would remain strong because there are few other investment choices.
Despite China's latest reduction of its US debt holdings, foreign holdings of US debt rose to $4.48 trillion by the end of March, rising $4.9 billion higher than at the end of February.
Japan, the second-largest holder of US debt, increased its holdings by $17.6 billion to $907.9 billion, while the United Kingdom, the third-largest holder, increased its holdings of US debt by $29.7 billion to $325.2 billion.
Yoshihiko Noda, Japan's finance minister, said in April that the Japanese government will continue to regard US Treasury debt as an attractive investment, despite Standard & Poor's assessment.
Li Wei, an economist with Standard Chartered Bank Ltd in China, said some purchases attributed to the UK in fact originated in China. "Therefore, it's still unclear whether China is cutting its holdings by ($9.2 billion)."
Since the recent financial downturn, China has been adjusting its investments in foreign reserves to mitigate risks. In pursuing that plan, though, the country has found it best to avoid simply dumping the debt it has purchased.
A quick sale would cause the value of the debt to slump, which would in turn affect China's remaining holdings, explained Wang Jun, an economist at the China Center for International Economic Exchanges.
In April, the country said it was looking at buying more bonds from European countries after it had invested billions of euros in Portuguese and Greek bonds and was also weighing investments in Spain, according to the Ministry of Foreign Affairs.
In a speech in Beijing on Tuesday, Herman Van Rompuy, president of the European Council, acknowledged "the confidence that China has demonstrated towards Europe" during the recent financial crisis.
"A stable eurozone is in our common interest," he said.