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Nikkei senior staff writer</p> </div> </div> </div> <div class="article-box detail"> <div class="wysiwyg_area"> <div class="articleBodyText"> <p class=" text-left">TOKYO -- Rumors that China is dumping U.S. Treasurys have made market players around the world skeptical about financial conditions in the world's second-largest economy.</p><p class=" text-left">     The People's Bank of China, the country's central bank, on Aug. 25 cut interest rates and reserve requirement ratios for lenders. Immediately after the move, the People's Daily Online, the mouthpiece for the Communist Party, gave one reason for the bank's looser monetary policy. Given the decline in funds devoted to the purchase of foreign currency, and capital outflows stemming from the cheaper yuan in recent weeks, the lowering of reserve requirements will increase liquidity and help ease upward pressure on interest, the newspaper said in its online edition.</p><div class="object-left"> <div class="object-left fb"> <div class="object-left"> <div class="js_enlarge"> <a href="javascript:%20void(0);" class="mwTrg" alt="zoom_80424"> <div class="image-side"> <img src="https://web.archive.org/web/20150907193846im_/http://asia.nikkei.com/var/site_cache/storage/images/node_43/node_51/2015/201509/20150902/20150902_pbc/1245885-1-eng-GB/20150902_PBC_middle_320.jpg" alt="" class=""><p class="date-area img-caption"> The People's Bank of China appears to have more money on hand than the country's total foreign reserves. </p> </div> </a> </div> <div class="modal-zoom" id="zoom_80424"> <a href="javascript:%20void(0);" class="js_close fb">Close</a> <img src="https://web.archive.org/web/20150907193846im_/http://asia.nikkei.com/var/site_cache/storage/images/node_43/node_51/2015/201509/20150902/20150902_pbc/1245885-1-eng-GB/20150902_PBC_article_main_image.jpg" alt="" class=""><p class="date-area"> The People's Bank of China appears to have more money on hand than the country's total foreign reserves. </p> </div> </div> </div> </div><p class=" text-left">     The yuan's devaluation on Aug. 11 has intensified capital outflows from China, making it increasingly difficult for the domestic financial market to raise funds. The People's Daily Online article tacitly acknowledges this problem.</p><p class=" text-left">     Funds available for foreign currency purchases declined because the authorities had to sell Treasurys to meet demand for dollars and other foreign currencies associated with capital flight. "The PBOC has sold at least $106 billion of reserve assets in the last two weeks, including Treasurys, according to an estimate from Societe Generale," U.S. wire service Bloomberg reported Aug. 27.</p><p class=" text-left"><b>Still at the top</b></p><div class="page_limit free"></div><div class="page_limit"></div><p class=" text-left">Surprisingly, however, China's Treasury holdings have not declined much; it is still the largest overseas holder of U.S. government bonds, ahead of Japan. A key to the mystery is the decline in China's Treasury holdings in Belgium and Switzerland. China has been selling off bonds held in trust by Euroclear, a Belgium-based international clearing and settlement organization, and other institutions. China's foreign reserves stood at $3.99 trillion at the end of June 2014, falling to $3.65 trillion at the end of July this year.</p><p class=" text-left">     The decline is undesirable from the perspective of the Chinese authorities, who see foreign reserves as a symbol of national prestige. Beijing is probably hoping to save face by maintaining its Treasury holdings.</p><p class=" text-left">     China is still by far the largest holder of foreign reserves, so why is the country's cashflow problem being discussed in the media? The answer lies in the makeup of those reserves.</p><p class=" text-left">     According to data from the U.S. Treasury Department, China's Treasury holdings -- $1.82 trillion -- were only about 45% of its total foreign reserves, even at their peak at the end of June 2014. Even if the bonds held by Euroclear and other institutions are included, Treasurys only amount to about half the total.</p><p class=" text-left"><b>Turning sour</b></p><div class="page_break auto free"></div><div class="page_break auto"></div><p class=" text-left">China invests some of that money in Euro bonds, Japanese government bonds and Japanese, U.S. and European stocks, but "it is unknown how China manages at least $1 trillion of foreign reserves," said a veteran market economist.</p><p class=" text-left">     Another puzzle is that although the country's foreign reserves stood at $3.65 trillion at the end of July, foreign-currency assets held by the central bank amounted to 27.4 trillion yuan ($4.31 trillion). It thus appears the amount of money the bank has on hand exceeds China's foreign reserves, although the difference between the two would be a foreign exchange loss associated with the yuan's previous strength.</p><div class="object-right"> <div class="object-right fb"> <div class="object-right"> <div class="js_enlarge"> <a href="javascript:%20void(0);" class="mwTrg" alt="zoom_80425"> <div class="image-side"> <img src="https://web.archive.org/web/20150907193846im_/http://asia.nikkei.com/var/site_cache/storage/images/node_43/node_51/2015/201509/20150902/20150902_iron-ore-in-brazil/3268004-1-eng-GB/20150902_iron-ore-in-Brazil_middle_320.jpg" alt="" class=""><p class="date-area img-caption"> A truck is loaded with iron ore from a mine in northern Brazil. Commodity prices are falling sharply as China's economy slows. </p> </div> </a> </div> <div class="modal-zoom" id="zoom_80425"> <a href="javascript:%20void(0);" class="js_close fb">Close</a> <img src="https://web.archive.org/web/20150907193846im_/http://asia.nikkei.com/var/site_cache/storage/images/node_43/node_51/2015/201509/20150902/20150902_iron-ore-in-brazil/3268004-1-eng-GB/20150902_iron-ore-in-Brazil_article_main_image.jpg" alt="" class=""><p class="date-area"> A truck is loaded with iron ore from a mine in northern Brazil. Commodity prices are falling sharply as China's economy slows. </p> </div> </div> </div> </div><p class=" text-left">     Market players are becoming increasingly concerned that China's foreign reserves might have been shifted to sovereign wealth funds and other financial instruments for unexplained purposes. Reserves have also been used to finance the China-led Silk Road Fund and the Asian Infrastructure Investment Bank.</p><p class=" text-left">     China has aggressively invested in resource development in Africa and Latin America over the past decade or so, which may account for some of the missing cash.</p><p class=" text-left">     The recent collapse of global commodity prices threatens the profitability of these African and Latin American projects. A substantial chunk of this investment must have been been wasted. That raises questions about whether the numbers on China's foreign reserves and the central bank's foreign-denominated assets are also being fudged.</p><p class=" text-left">     The European sovereign debt crisis began with Greece's effort to hide its fiscal deficits. Doubts about the level of China's foreign reserves could spark new a financial crisis. 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