Japan or the United States, it's a choice between "bad or worse" - this is the situation facing China as it decides whether to buy Japanese or US debt.
China has been buying Japanese treasury debt for six consecutive months, almost five times the total growth in new holdings during the past five years. At the same time, its holdings of US treasury bonds dropped for two months after hitting a yearly high of $900.2 billion in April.
However, Japanese debt has a unique holding structure, with only 5 percent of the total issued held by outside investors while 33 percent of US treasury debt is owned by foreigners. Because native investors don't have currency exchange risks, the structure of Japanese treasury debt means it is more secure than the US.
Another main potential risk for China in holding foreign government bonds is that the currency may depreciate as the US dollar did since the eruption of the global financial crisis. However, the yen continued to rise in the past three years, up 27 percent against the US dollar.
The yen and gold are the only two commodities whose market price is higher than before the crisis.
The appreciation of the yen comes from Japan's surplus current account, large overseas net assets and the need for international arbitrage.
After the crisis, excessive demand for the yen boosted its price. The yen's short-term price will remain strong against the US dollar.
Japan has a low yield rate of 1 percent and policy risks such as a liquidity trap, a financial deficit and aging problems while US has a weak currency but a 3 percent yield rate and favorable long-term expectations regarding its economy.
In fact, Chinese investors have not given up on US treasury bonds. Though the buying of short-term debt dropped, holdings of US long-term treasury bonds increased by $88.5 billion in the past ten months.
To solve the problem completely, the nation should reform its economic structure and currency management mechanism if it wants to prevent a "twin surplus" in both its current and capital accounts.
The author is a researcher with Shanghai Institute for International Studies.