China buys Japanese bonds at record pace

Updated: 2010-07-08 13:53
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China bought a net 735.2 billion yen ($8.3 billion) of Japanese bonds in May, more than doubling purchases for this year as it heads for the biggest annual increase since at least 2005.

China's purchases of Japanese bonds exceeded sales by 1.28 trillion yen since January, after net sales of 78.7 billion yen for the whole of 2009, according to data released by Japan's Ministry of Finance. This year's purchases are nearly five times as much as for the whole of 2005, which was the biggest year for Chinese net bond buying between 2005 and 2009, the data show.

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The yield on Japan's benchmark 10-year bond plunged in the second quarter by the most since the final three months of 2008, reaching 1.055 percent on July 1, the lowest since August 2003. China may reconsider the make-up of the world's biggest foreign exchange reserves, which have so far focused on Treasuries, said Susumu Kato, chief economist in Tokyo at Credit Agricole CIB and CLSA, a unit of France's largest bank by branches.

"It's a welcome step," Kato said, "China has long underweighted the holding of the yen in its foreign currency reserves."

China boosted holdings of Treasury notes and bonds by 2.6 percent to $900.2 billion in March and April, after reducing its stake by 6.5 percent from November through February, the longest consecutive monthly declines in a decade, US data released June 15 showed. The People's Bank of China said June 19 that it will relax its 23-month lock on the yuan. China's foreign-exchange reserves stood at $2.45 trillion as of March 31.

"It would not be a surprise if China eventually boosted the weighting of the yen to 20 percent of its reserves from a trading volume viewpoint," Credit Agricole's Kato said.

China bought a net 694.8 billion yen in shorter-maturity notes in May, and a net 40.4 billion yen in longer-dated bonds.

The Japanese government revised the way it calculates bond-purchase data in 2005, the ministry has said.