China concerned about U.S. debt holdings

China, the largest foreign holder of U.S. debt, will be relieved by the agreement in Washington to raise the debt ceiling, but concerns remain, analysts said. "The agreement is likely to avert default by Washington and it certainly is a relief for China," Chen Daofu at China's State Council's Development Research Center, told China Daily. China has not officially responded to the latest development in Washington but analysts say it is likely to view the deficit reduction bill as a positive in restoring investor confidence in the U.S. dollar and the U.S. bond market, the report said. The Chinese have been concerned about the impact of a weakening dollar on its mountainous foreign exchange reserves, much of it in U.S. dollars. At the end of June, China's foreign exchange reserves holdings soared 30.3 percent year-on-year to $3.2 trillion. China increased its holdings of U.S. Treasury bonds by $7.3 billion to $1.16 trillion in May. Other economists said the question still remained whether the latest move in Washington would help in stopping a downgrade of U.S. credit rating if long-term and balanced solutions to address its debt problem are not found. Yu Yongding, a former adviser to the People's Bank of China, has repeatedly called on the government to reduce the holdings of U.S. Treasury bonds as the dollar likely would continue to weaken, China Daily said. However, the report said, other analysts warn a large sell-off of U.S. bonds would be financial suicide for China as it would drive down the value of its own holdings. Investment bank China International Capital Corp. warned Monday the U.S. economy remains a cause for concern, as the debt crisis may have a negative impact on spending that may drag down the U.S. economy for the rest of the year.