China rapidly expands investments in Japanese government bonds

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TOKYO, July 31 Kyodo -
China sharply expanded investments in Japanese government bonds in the first
months of this year as part of the country's apparent move to increase relative
exposure to stable Japanese vehicles against the backdrop of the European debt
crisis, data from the Japanese Finance Ministry and other sources showed
Saturday.
While welcoming the interest from deep-pocketed China as it sits on rapidly
growing foreign currency reserves, Japanese officials remain guarded about its
intentions and conduct, considering it possible that the sharp expansion in
investments may turn out to be a temporary action to shift funds to ''safe''
instruments.
According to the Japanese Finance Ministry, China purchased 1.28 trillion yen
more Japanese securities than they sold in the January-May period this year.
The amount -- for just less than half a year -- already eclipses the record
253.8 billion yen in net purchases for a whole year logged in 2005. In May
alone, the month for which the latest data are available, its net purchases
surpassed 735.2 billion yen, a record high monthly figure.
Most of the money is believed to have been invested in Japanese governments
bonds with the majority going into short-term instruments maturing in one year
or less.
The Chinese Foreign Ministry explained that such investments are a strategy to
diversify investment of foreign currency reserves, according to Qin Gang,
deputy director general of the ministry's Information Department.
The State Administration of Foreign Exchange, meanwhile, said the most
important principle in investments in ''safety.''
A market participant said investments in Japanese government bonds accelerated
because they are perceived as one of the safest asset vehicles in the world.
It remains unknown, however, how long the Chinese interest in Japanese debt
instruments may continue, given China's downbeat perception about Japan's debt
repayment capability.
In its first assessment of the sovereign debt of 50 countries issued in July,
Dagong Global Credit Rating Co. gave an AA-minus rating with a ''negative''
outlook for Japanese government bonds.
The agency said the market has concerns about the Japanese government's debt
repayment capability because of the abnormal growth of the fiscal deficit while
the economic downturn is preventing the government from terminating all its
fiscal expansion programs.
Observers are also paying attention to see if China can be as stable a supplier
of funds as Western economies. China imposes restrictions on investments by its
private-sector entities in foreign securities, meaning that the majority of
investment flows from China is at the mercy of Beijing's whim.
China has seen its foreign currency reserves grow sharply as a result of
currency market intervention by the People's Bank of China, the central bank,
to stem the Chinese yuan's gains against the dollar.
As of the end of June, China was sitting on 2.45 trillion dollars worth of
reserves, the world's largest, with an estimated 70 percent or so invested in
dollar assets such as U.S. treasury bonds.
China, however, is thought to have been adjusting its dollar-oriented
investment portfolios following the financial crisis in the United States two
years ago.
Japan had roughly 684 trillion yen in outstanding government bonds as of March
31, data by the Bank of Japan, the central bank, shows. Of this amount, only
4.6 percent was owned by overseas investors. The Japanese government is
planning to step up its efforts to market its bonds overseas, because too much
reliance on domestic investors could turn out to be destabilizing.
Hisashi Yamada, a senior researcher at the Japan Research Institute, said, ''If
China sees Japan's fiscal policy is not sustainable, it would not be investing
in Japan even if it has excess foreign currency reserves.''
A source at the Japanese Finance Ministry remained alert, saying, ''We need to
get the measure of the intent of China's selling and buying.''
==Kyodo
2010-07-31 22:53:18