The Great Debate

China cuts Treasury holding to fund foreign deals

– Wei Gu is a Reuters columnist. The opinions expressed are her own —

Please don’t call it a liquidity crunch, but it rather looks as though China might have had to sell a sliver of its vast hoard of U.S. Treasury paper to fund its private sector’s big overseas foray.

China’s holding passed $800 billion in May, sparking speculation that it could reach $1 trillion within a year, but the net June figure, published on Monday, showed a 3.1 percent drop to $776.4 billion, the biggest percentage fall in nearly nine years.

It’s clear that China has been keen to use more of its reserves to secure strategic resources supply overseas, as well as diversifying them into emerging markets such as Africa to help create demand for Chinese exports. The unwinding of global imbalances also means China might have fewer dollars to invest, as its July trade surplus more than halved from a year earlier.

In the past, almost all outflows from China come from the government, which by default put the money into U.S. Treasuries. But now the private sector needs more foreign currency.

Just this month, China’s Yanzhou Coal Mining agreed to buy Australian coal miner Felix Resources for $2.9 billion, and Sinochem Corp. spent $878 million buying British oil and gas explorer Emerald Energy.

The government itself also seems to be getting more adventurous. Its $200 billion sovereign fund finished 2008 with almost 90 percent of its assets in cash, but is determined to put more money to work this year.