China finds Japanese bonds safer than US debt

Beijing; China has been buying record amounts of Japanese government debt because it is less risky than US debt, at least in the short term, a Chinese government economist said Wednesday.

Investing in Japanese bonds is safer because so much of the country's debt is held domestically and the yen is on course to strengthen further, said Zhang Ming, an economist with the Chinese Academy of Social Sciences, a top government think tank.

"Even though the difference in yields is big, China has been abandoning US debt and picking up Japanese debt. This definitely shows that it believes the risks of US debt far exceed those of Japanese debt," Zhang said in a report issued by his research institute. The report was issued a day after the Federal Reserve said it would buy more US government debt in a form of mild quantitative easing to counter economic weakness.

Top Chinese leaders have previously registered their concerns about lax US fiscal policies eroding the value of their investments in the US. A source familiar with China's strategy for investing its foreign exchange reserves said the Fed's decision might, in fact, be well received in Beijing.

"The purpose for the Fed in buying Treasuries is to support US economic growth, which is positive," he said.

Chinese net acquisition of Japanese debt in 2010 has reached more than 1.7 trillion yen ($19.9 billion), already far surpassing its record of 255.7 billion in 2005.

At the same time, China has pared back its vast holdings of US debt, from $894.8 billion at the start of this year to $867.7 billion in May, according to the most recent data.

Japan's two-year notes are yielding around 0.135 per cent, but all eyes are on the yen, which is nearing a 15-year high against the ailing dollar. The yen has gained nearly 9 per cent on the greenback this year after a spare of weak US economic reports sent investors scurrying to less risky assets.

China has long said that it wants to diversify its foreign exchange reserves, the biggest in the world at $2.45 trillion.

• $19.9b net acquisition of Japanese debt
• $867.7b holdings of US debt in May