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[BEIJING] China is prepared to increase its holdings of US Treasuries under the right circumstances, as officials judge the assets are becoming more attractive than other sovereign debt and as the yuan stabilises, according to people familiar with the matter. Treasuries rose, driving yields to the lowest since November.
The people didn't specify the exact circumstances for continuing a run of purchases that has extended to two months through March, after reductions in all but one of the previous eight months.
The nation has maintained the trend, said the people, who asked not to be identified because they aren't authorised to comment on the matter publicly. The yuan has climbed more than two per cent against the US dollar this year, after plunging 6.5 per cent in 2016 in its biggest decline in more than two decades.
While China reduced its ownership of Treasuries last year by the most in data going back to 2000 as it sought to defend the yuan, it has since changed strategy and added to its holdings in the two months through March.
Policy makers have also recently signalled support for the currency, with a senior central bank official saying Tuesday that the nation is looking to promote yuan globalisation and the government announcing on May 26 that it's considering changes to the currency's fixing mechanism to reduce volatility.
"When the yuan appreciates, China has the opportunity of building up its foreign reserves as the market has been concerned about the reduction of the reserves," said Tommy Ong, managing director for treasury and markets at DBS Hong Kong Ltd.
"Buying US bonds will help boost confidence, as officials want to show that any anxiety about yuan weakness or devaluation was excessive. They don't want the exchange rate to appreciate or depreciate in a large magnitude before the Communist Party congress later this year."
In March, China increased its holdings of US government bonds, notes and bills by US$27.9 billion to US$1.09 trillion, latest available data show. Adding a US$3.7 billion rise in Belgium's ownership, which is often seen as a home to China's custodial accounts, the total increase was the biggest since 2014.
The Asian nation's foreign-exchange reserves probably climbed for the fourth month in a row in May, according to a Bloomberg survey before data due on Wednesday. The stockpile shrank US$320 billion last year.
China's shift to buyer of Treasuries coincides with a four-month rally that's reversed much of the selloff triggered by the US election in November.
Investors have piled back into bonds on fading expectations for quicker economic growth and inflation. In trading Tuesday, the 10-year yield dropped as much as five basis points to 2.13 per cent, the lowest since Nov 10. The maturity yielded about 1.7 per cent a year ago.
The Federal Reserve is widely expected to raise its borrowing costs next week, narrowing the rate gap between China and the US and making American assets more attractive. China's Communist Party will hold a twice-a-decade leadership transition this fall.
The PBOC redirected a request for comment to the State Administration of Foreign Exchange, which didn't immediately reply to a fax seeking comment.