China Goes on Japanese Bond Shopping Spree

China continues to be vocal about its reserves diversification and still mum on the details. Its State Administration of Foreign Exchange (SAFE) is now posting soothing Q&As on its website in order to calm fears about its $2.4 trillion cash mountain without actually offering any specifics about recent changes in its allocation.

However, at least one detail has come to the fore. China has markedly increased its purchases of Japanese bonds… to the tune of about $6.2 billion in the first quarter of 2010.

From today’s Wall Street Journal:

“The statement reiterated China’s rationale for diversifying its reserves, long dominated by dollar assets, saying it can help control risk and maintain the stability of the ‘overall value’ of reserves.

“China, the biggest holder of U.S. government debt, has ramped up purchases of Japanese government bonds this year, apparently part of its diversification effort. China bought some $6.17 billion in Japanese government bonds in the first four months of the year, more than double the full-year record it set in 2005.

“The statement said that China’s investment in U.S. debt ‘is a market investment action’ and that ‘whether to increase or reduce holdings of U.S. sovereign debt is entirely a normal investment operation.'”

Speculation China’s SAFE reserves abounds, especially given its recent comments about decreased investment in US and euro-zone debt as well as its insistent dismissal of gold as a useful reserves asset despite speculation that the country is already buying gold directly from its domestic producers on an ongoing basis.

Yesterday, the WSJ also noted that the spiking Japanese bond purchases are a dramatic departure from last year. During 2009, China net sold roughly 80 billion yen (nearly $1 billion) in Japanese securities.

The SAFE reserves guessing game will continue and the stakes remain high. You can read more details in The Wall Street Journal’s coverage of China pouring into Japanese bonds and saying it won’t threaten with US debt.


Rocky Vega,
The Daily Reckoning