US Treasuries fail to provide safety or liquidity when it comes to managing China's $2.45 trillion foreign-exchange reserves, said Yu Yongding, a former central bank adviser.
"I do not think treasuries are safe in the medium- and long-run," Yu, a member of the State-backed Chinese Academy of Social Sciences, wrote yesterday in an e-mailed response to questions. China is unable to sell the securities in a "big way" and a "scary trajectory" of budget deficits and a growing supply of dollars put their value at risk, he said.
The State Administration of Foreign Exchange, which manages the nation's reserves, said last month that government debt has the benefits of "relatively good" safety, liquidity, low trading costs and market capacity. China's holdings of Treasuries, the largest outside of the US, totaled $867.7 billion at the end of May, down from $900.2 billion in April and a record $939.9 billion in July 2009.
To help cool demand for the securities, China needs to curb the growth of its foreign reserves by intervening less in the currency market, Yu said. The People's Bank of China said June 19 it would let the yuan float with reference to a basket of currencies, ending a two-year-old dollar peg.
The yuan has since appreciated 0.8 percent to 6.7742 per dollar and analysts surveyed by Bloomberg predict the currency will end the year at 6.67, based on the median estimate.
