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China Purchases Japan’s Debt as Yen Beats Dollar, Euro

China bought a net 262.5 billion yen ($3.1 billion) of Japanese bonds in October, the first time in three months the nation increased holdings of yen-denominated assets as that currency outperformed the dollar and euro.

China purchased a net 231.9 billion yen in short-term Japanese debt and 30.6 billion yen in long-term bonds, Japan’s Ministry of Finance said in a statement today. China increased holdings of South Korean government bonds in November by the most in six months, taking advantage of a retreat in the won, according to data released two days ago by South Korea’s Financial Supervisory Service.

“With a risk of the dollar’s depreciation and the current instability in the financial market and the euro, China is likely to be diversifying its portfolio steadily,” said Satoru Ogasawara, vice president of economics research in Tokyo at Credit Suisse Group AG. “The dollar probably makes up 90 percent of China’s foreign-exchange reserves.”

The yen was the biggest gainer versus the dollar and euro this year among the world’s most-traded major currencies. Chinese central bank adviser Li Daokui said last month in an interview with a state broadcaster that his nation can consider selling Treasuries as a way to seek compensation for losses caused to its foreign exchange investments by the U.S.’s decision to undertake so-called quantitative easing.

Currency Diversification

Treasuries handed investors a 0.7 percent loss last month, the steepest decline since March, according to Bank of America Merrill Lynch data. The dollar has fallen 1.2 percent and the euro has slid 9.3 percent this year in a measure of the currencies of 10 developed nations, Bloomberg Correlation-Weighted Currency Indexes show.

China is considering allocating more of its $2.65 trillion foreign-exchange reserves to emerging-market currencies to boost returns, central bank Governor Zhou Xiaochuan said in October. The nation’s holdings of U.S. Treasuries fell 1.3 percent in the first nine months of this year to $883.5 billion.

China’s net purchases of Korean Treasury bonds amounted to 556 billion won ($487 million), 27 percent more than in October, according to data released Dec. 6 by South Korea’s Financial Supervisory Service. Total holdings increased 9.9 percent to 6.14 trillion won, more than triple the level at the start of 2010. The won’s slide of about 3 percent versus the dollar in November marked its biggest decline since May.

‘Gains From Currencies’

“China probably aims for gains from currencies, not from returns from debt,” said Ayako Sera, who helps oversee about $310 billion in Tokyo as a strategist at Sumitomo Trust & Banking Co. “It seems China bought Japanese debt just for now because the dollar and euro are weak.”

The yen climbed to 80.22 per dollar on Nov. 1, the highest since April 1995. It traded at 83.65 as of 11:08 a.m. in Tokyo.

Japan’s benchmark 10-year yields sank to a seven-year low of 0.82 percent on Oct. 6, a day after the Bank of Japan cut its key interest rate to a range of zero to 0.1 percent and announced the creation of a 5 trillion-yen fund to buy domestic debt. The yield was at 1.205 percent today.

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