First of all, this is related to the deleveraging of global financial institutions. International financial institutions have generally implemented the value-at-risk (VAR) asset management model. Under this model, once the asset price falls, financial institutions will be forced to shrink their financial leverage and repay their debts by selling risky assets. At the same time, the major financial institutions in the world started the deleveraging process, which led to the large-scale withdrawal of short-term international capital from the capital markets of emerging market countries (which is also the fundamental reason why South Korea and other countries are facing capital outflows) and returned to the United States. After all, the US dollar is still the most liquid currency in the current international monetary system, and US Treasury bonds are still the most liquid assets in the current international financial market. A large amount of short-term international capital flows back into the US dollar treasury bond market, resulting in two consequences. First, the yield curve of US Treasury bonds has become very steep. Due to a large number of short-term international capital investing in short-term US Treasury bonds for hedging, the yield level of short-term US Treasury bonds dropped rapidly, and even negative interest rates once appeared. The second is the sharp appreciation of the US dollar against other major currencies, especially the euro. Since the beginning of 2008, the dollar has appreciated by more than 25% against the euro. The strong exchange rate of the US dollar is also one of the reasons for the decline in global crude oil and primary product prices.

Second, this is related to the RMB exchange rate policy of the Bank of China. Although from July 2005, China began to implement the exchange rate policy of RMB floating with reference to a basket of currencies. However, since the third quarter of 2008, with the deepening of the subprime mortgage crisis in the United States, the impact on China's export industry has increased, and the appreciation of RMB against the US dollar has obviously slowed down. In the third quarter of 2008, the nominal exchange rate of RMB against the US dollar only appreciated by 0.6%. Due to the sharp appreciation of the US dollar against the euro during this period, the exchange rate of RMB pegged to the US dollar actually appreciated sharply against the euro. In the third quarter of 2008, the nominal exchange rate of RMB against the euro appreciated by 7.5%, which is the largest single-quarter appreciation of RMB against the euro since the exchange rate reform.

Based on the above two reasons, it is not difficult to understand why the Bank of China continues to increase its holdings of US dollar treasury bonds. With the US short-term treasury bonds regaining the favor of international investors, the US dollar has greatly appreciated against other major currencies. In this context, if you reduce your holdings of US dollar assets and increase your holdings of assets in other currencies, it will lead to a large book loss in the market value of foreign exchange reserves (because foreign exchange reserves are denominated in US dollars). Therefore, increasing the holdings of US dollar treasury bonds has become a temporary choice for the Bank of China. Among the U.S. Treasury bonds increased by Bank of China, the proportion of short-term Treasury bonds may increase significantly, because the market value of long-term Treasury bonds fluctuates more during the period of financial market turmoil. Increasing the holdings of US short-term treasury bonds is also a disguised embodiment of the idea that "cash is king". There is also the issue of buying US Treasury bonds. At present, many people in China think that the China administration's purchase of US Treasury bonds is a subsidy from poor countries to rich countries, and China is saving the US financial crisis. Therefore, the United States can achieve debt default through the depreciation of the dollar. But in fact, this view is wrong, because if China has a large amount of foreign exchange reserves, China can hold them in the form of physical assets and financial assets. If you hold physical assets, when these assets depreciate, foreign exchange reserves will also decrease. In addition, the cost of holding physical assets and the convenience of realizing them will also increase the risk of impairment of foreign exchange reserves. If foreign exchange reserves are financial assets, then we need to consider what kind of financial assets these foreign exchange reserves hold. Are there any financial assets in the world with lower risk than US Treasury bonds? It can be said that in this subprime mortgage crisis, if China's foreign exchange reserves are not held in a high proportion of US Treasury bonds, then the risks it faces are much higher than now. Some people say that the recent rescue plan of the United States will inevitably issue government bonds. If China buys US Treasury bonds, it is saving the United States. However, if China's foreign exchange reserves don't buy US Treasury bonds, what financial assets are there in the world with lower risk than US Treasury bonds? Therefore, in view of the current turmoil in the international financial market, buying US Treasury bonds may be the best way to reduce the risk of China's foreign exchange reserves. The structure of China's foreign exchange reserves holding financial assets should be to increase the proportion of US Treasury bonds.