Second best option

China, the largest foreign holder of U.S. government debt, started reducing its U.S. debt holdings in 2011 due to the drop in Treasury yields. The country reduced U.S. debt holdings by around 100 billion U.S. dollars in November 2011, and increased or cut the holdings by billions of U.S. dollars in the following year.

"The increase in China's U.S. debt holdings at the end of last year is normal market behavior," said Sun Huayu, a professor at Jinan University's International Business School. "China posted a large trade surplus last year, which increased its foreign exchange reserves."

China's trade surplus hit a three-year high of 231.1 billion U.S. dollars last year, up over 48 percent from the previous year, according to statistics from the General Administration of Customs.

Haitong Securities noted that the country's trade surplus rose more than expected last year. The monthly trade surplus started in March, and fluctuated around 20 billion U.S. dollars in the following months, higher than the historical average.

Due to safety and liquidity needs, a major part of the increased foreign exchange reserves have been spent on U.S. government debt.

Prof. Sun said that safety overrides returns when it comes to foreign exchange reserves because higher returns mean higher risk. Compared with euro and yen assets and those of emerging markets, U.S. government debt is safer and has higher liquidity. Therefore, it is a second best option for China to increase U.S. debt holdings.

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