The money markets have spent much of the past two months speculating on whether the Federal Reserve will commence a renewed bout of quantitative easing (QE), sending yields on US 10-year Treasuries down to 2 per cent, the lowest level in six months. But with QE yet to materialise, price support can only be coming from China, which added a further $12.7bn (£8bn) of US debt to its $1.17 trillion stockpile in February, according to US Treasury figures.
The spike in buying is partly explained by the distorting effect of the Chinese New Year on normal purchasing patterns; lower imports of raw materials combined with a fall in exports meant fewer dollars were needed to fund trade. But the increase in China's export surplus in the past two months on weaker comparables has helped boost the debt stockpile. This is also a consequence of the eurozone's problems as investors have been pulling funds out of European economies and switching them into the US, which has recently shown signs of a nascent economic recovery.
But, despite the switchover, it has become obvious that China is slowly diversifying its foreign currency reserves in favour, surprisingly, of the troubled euro and the more illiquid Scandinavian currencies. Slowly is the operative word because switching too quickly could undermine the value of its existing dollar holdings, which make up about 60 per cent of the country's total reserves.
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