Taken from Bloomberg.com

By Bloomberg News

Jan. 20 (Bloomberg) -- China, which cut Treasury holdings by the most in five months in November, may reduce purchases further on concern the dollar will decline, said Liu Yuhui, an economist at the Chinese Academy of Social Sciences.

The Asian nation’s investors, the biggest foreign holders of U.S. government debt, trimmed holdings by $9.3 billion in November to $789.6 billion, a Treasury Department report showed yesterday. The decline came even as Chinese foreign-exchange reserves swelled $61 billion in the month.

“China may reduce purchases of U.S. Treasuries because there has been no sign the dollar’s long-term trend of weakness will change,” said Liu, director of the Center for Chinese Economic Evaluation in Beijing at CASS, a government-backed research body. “But it won’t likely make a big adjustment to its existing holdings.”

The Dollar Index, a gauge of the greenback’s strength against six other major currencies, has slumped 11 percent since Premier Wen Jiabao said on March 13 last year that he was worried about the “safety” of China’s U.S. investments. People’s Bank of China Deputy Governor Zhu Min said in Beijing on Dec. 17 that the dollar is set to weaken as President Barack Obama grapples with annual budget deficits in excess of $1 trillion.

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., increased holdings of non- dollar developed-market debt last month to the most since October 2004. Gross boosted the $201.7 billion Total Return Fund’s investment in the securities to 16 percent of assets in December from 5 percent in November, according to Pimco’s Web site.

‘Declining Trend’

CHINA MAY BUY LESS US DEBT ON DOLLAR DROP

“What many global bond managers are really thinking is that cross-border investment outside the U.S. has become a gigantic bet on the long-term declining trend in the dollar,” Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, said in an e-mail interview.

CASS’s Liu said China may step up investments in energy and natural resources because demand will rise as the global economy is recovering from a slump, which will push up commodity prices.

China’s foreign-currency reserves, the world’s largest, rose to a record $2.4 trillion at the end of December, the central bank said on Jan. 15. Liu predicted the dollar’s weakness will last two to three years.

--Judy Chen, Wes Goodman. With reporting from Vincent Del Giudice, Theophilos Argitis in Winnipeg and Greg Quinn in Ottawa. Editors: Sandy Hendry