A decline in China's declared holdings of U.S. Treasury bills comes as it is trying to diversify its foreign assets.
But analysts say Washington's debt is still the only asset big enough to absorb the trade-fueled flood of cash Beijing needs to invest, and it might be adding to its hoard with secret purchases through banks abroad.
A U.S. government report this week showed Chinese holdings of Treasury bills fell by $34 billion in December.
That fueled concern Washington might have to pay higher interest to attract creditors to finance this year's forecast $1.5 trillion budget deficit.
It came as Chinese leaders, facing pressure to pay for social spending and other expenses, are trying to make more money by diversifying their $2.4 trillion in reserves beyond safe but low-yielding Treasurys.
A $200 billion sovereign wealth fund launched in 2007 is investing in riskier but more profitable stocks and commodities.
Analysts say the true size of Chinese holdings of U.S. government debt is bigger than reported but is obscured because Beijing also buys anonymously through banks in Britain, Switzerland and elsewhere. They say such investment might be growing.
"We do not believe that the Chinese are dumping Treasurys," said Arthur Kroeber, managing director of GaveKal Dragonomics, a Beijing research firm.
"What they are doing is diversifying the channels through which they make these purchases so that it is much more difficult for the market to ascertain what they are doing."
Beijing has long been Washington's top foreign lender, banking its huge trade surplus in Treasurys and helping to pay for budget deficits.
That is a function of exchange rate controls that require the central bank to buy up dollars that flow in from export sales to keep China's currency, the yuan, from rising and making its goods uncompetitive abroad.
Economists say Treasurys are the only debt market big and liquid enough to absorb the billions of dollars a month that Beijing must invest abroad.
"While the value of the U.S. dollar seems uncertain, other alternatives are not easy to find," UBS economist Tao Wang said in a January report.
Beijing's reserves are already so vast that Wang estimated last year that if it decided to shift even 5 percent into gold, that would require an amount of bullion equal to the annual production of all the world's gold mines.
China treats details of its reserves as a state secret but analysts estimate two-thirds are in U.S. dollar-denominated assets and the rest mostly in euros and yen.
The U.S. Treasury's report this week showed China giving up its status as top creditor to Japan, though it was still No. 2 with officially declared Treasury holdings of $755.4 billion.
The figures "suggest that China could be more actively diversifying its currency reserves away from U.S. Treasuries," said Jing Ulrich, JP Morgan's chairwoman of China equities, in a report.
"In general, China is moving towards more active management for a portion of its foreign reserves."
Chinese leaders including Premier Wen Jiabao, the country's top economic figure, have publicly expressed concern about the health of the U.S. economy and appealed to Washington to avoid any steps that might erode the value of the dollar and Beijing's holdings.
Beijing also expressed unease last year about global reliance on the dollar for trade and government reserves and proposed the creation of a new world currency.
Some American commentators have suggested China might abruptly sell Treasurys to express its anger at Washington over Taiwan, Tibet or other diplomatic strains.
But Beijing has never publicly threatened such a move, which economists say would be expensive and could hurt China by causing problems in a key export market.
The decline in reported holdings also could reflect the global slump in trade after the economic crisis hit in 2008 as well as an end to rules that used to require Chinese companies to bring home nearly every dollar they earned abroad.
China's politically sensitive trade surplus, a key driver of foreign reserve growth, narrowed to $14.2 billion in January. That was less than half the global $39.1 billion surplus the same month of 2009.
Beijing added just $28 billion to its publicly disclosed Treasury holdings last year, down from $249.8 billion in 2008.
But it said reserves rose by more than $300 billion, suggesting money also might be making its way into Treasurys through other channels.
It took China a decade to accumulate its first $1 trillion in foreign reserves by 2006 but growth skyrocketed as trade boomed and the total passed $2 trillion last April. It surged to $2.4 trillion by the end of 2009.
UBS's Wang said reserves are forecast to grow by another $400 billion this year.
The government's $200 billion sovereign wealth fund launched in September 2007 has bought stakes in mining, oil and other companies.
But analysts say such spending so far is too small to absorb the flood of money that is flowing into U.S. debt.
"It is clear they are stuck buying Treasurys," Kroeber said.
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