China sells off Japanese debt

TOKYO, October 8 – China sold a record Y2,000bn ($24.3bn) in short-term Japanese bills in August, suggesting that their hefty buying earlier this year was not aimed at diversification into the yen as some had speculated.

Chinese investors had bought a net Y2,300bn in Japanese bills and bonds between January and July.

The surge in bond buying had triggered speculation China may be diversifying its foreign reserves away from the euro and the dollar, adding to concerns about a recent surge in the Japanese currency that is threatening Japan’s fragile economic recovery.

But Japanese government data on Friday showed that Chinese investors had turned net sellers of short-term Japanese bills for the first time since last November, with the amount of net selling swelling to a monthly record on data going back to 2005.

“The buying and selling of short-term bills suggests that this probably was not a sign of any medium-term or long-term shift in foreign reserves away from the dollar and euro,” said Masafumi Yamamoto, chief FX strategist Japan for Barclays Capital.

“If there really were any related foreign exchange flows, it may mean that they were buying the yen when the yen was rising to try to increase returns,” Mr Yamamoto said.

Chinese investors were slight net buyers of medium- to long-term Japanese bonds in August, to the tune of Y10.3bn.

Coupled with their record net selling of short-term bills, Chinese investors’ total net buying of Japanese bills and bonds so far in 2010 fell to Y297.6bn.