While China has made a lot of noise about diversifying out of the dollar and U.S. Treasuries, it continues to buy record amounts of those government bonds.
China increased its Treasury holdings by $23.7 billion in March to a new record of $768 billion. The country remains the U.S. government's biggest lender.
The dollar is estimated to account for up to 70 percent of China's $1.95 trillion in currency reserves.
Chinese officials, up to Premier Wen Jiabao, have threatened to shift away from Treasuries and the dollar because the threat of spiraling U.S. inflation puts their investments at risk.
But, it will be very difficult for the Chinese to diversify, because their first sales of Treasuries and dollars would send those assets plunging, meaning they could lose big money on their later sales.
In addition, there is no market outside Treasuries that could easily handle such a large influx of money.
"Because of the sheer size of its reserves… (China) will immediately disrupt any other market it tries to shift into in a big way and could also collapse the value of its existing reserves if it sold too many dollars," a western official, who requested anonymity, told the Financial Times.
Others agree. "People have been saying … China will lose its appetite for Treasuries," Nicholas Lardy of the Peterson Institute for International Economics, tells Moneynews.
But, "If China continues to run up a large current account surplus, it must put that money somewhere."
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