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Since the moves of the US Federal Reserve System and Treasury Department have forced the dollar to decline, US Treasury bonds should have lost their charm. So, why does China continue to buy them?
China is the fastest-growing buyer of US Treasuries, and its foreign exchange reserves increased by $199 billion last year to reach $2.85 trillion. This has sparked concerns because there already is excessive liquidity in the Chinese market.
Yet China needs to hold the US Treasuries as an important way of safeguarding its economic security, given that the international financial order is dominated by the dollar.
Besides, the world's major financial institutions have given the Treasuries the thumbs-up sign in terms of security, liquidity, creditability and profitability. Going by this logic, China is justified in holding huge amounts of the Treasuries.
The question that arises is why Beijing is increasing its reserve of US Treasuries when it is beyond its reach to maintain its value, let alone make a profit out of them.
In a mature market economy, however, government departments should not take part in economic activities to make profit. And since China is leading its reform and opening-up on the basis of market economy, its departments, including the State Administration of Foreign Exchange (SAFE), should follow this rule.
The truth is that the SAEC, in essence, does manage the reserve assets to earn profit. Possibly, it does so because China's market economic system is not yet mature.
To secure earnings through reserve asset management, the authorities may find the following tips helpful. First, China can use US asset management experience for reference. Keeping its foreign exchange reserves on a reasonable scale, say, around $500-800 billion, the SAFE can entrust the rest of the reserve assets with specialized financial institutions that can invest them in profitable ventures. China has already accumulated some experience in this field. For instance, it has set up some commercial investment companies and a national sovereign wealth fund.
The advantage of such a move is that, compared with government authorities, commercial organizations have access to a wider range of profitable financial products.
The government, however, has to set up an assessment mechanism to determine and oversee whether such institutions can make profit. And it should let the media and experts help supervise their operations.