Data from the United States Treasury Department showed that China held $1,153.6 billion of US national debt as of August, down 124.9 billion year-on-year. Meanwhile, Chinese authorities' data indicates that China's overseas investment and investment in international stock markets both increased, hitting $382.3 billion and $100.6 billion, respectively, by the end of June.

China's investment of its foreign exchange reserves is getting more flexible and diversified. But the effects of the change are to be seen.

For one thing, the investment of foreign exchange reserves should be safe and ensure the liquidity of the capital. So China prefers investments with lower market fluctuations and strong liquidity. Yet, as foreign funds flow back to China and the Chinese show stronger intentions to invest and study abroad, China should prepare enough foreign exchanges for these needs. And China also faces some non-commercial obstacles that should be addressed, while diversifying its direct investment with its sovereign wealth funds.

China should pay more attention to the safety of its investments and lower the costs for private funds' overseas investment and trade.

The real diversification of China's foreign investment means that both the State and private sectors should have more opportunities to invest abroad.

If more private capital investment abroad becomes possible, it would be easier for Chinese companies with different ownerships to enter the international market. And China's central bank will have more financial resources to improve the efficiency of its currency policies from quantity control to price control, as China would have more outlets to invest its capital.

So far, US national debt remains the safest investment choice, given the sovereign debt crisis in the eurozone. Japan's central bank also intends to increase its holdings of US national debt.

The fact that China will lend more money to the US is actually in line with China's trade surplus with that country. So if China would like to maintain its trade surplus, it should know how much money it must lend to the US.

Only when there are other countries willing to buy US national debt can China reduce its holdings of US debt without affecting its trade surplus with the country.

What China should do now is to encourage more private capital of its nationals to invest in foreign countries together with its State investment of foreign exchange reserves. If China does not lend money to the US, the balance of global trade will be disturbed.

Translated by Li Yang from 21st Century Business Herald