Analysts said China may not necessarily need to use its US$1.2 trillion in forex reserves as the country now has a trade surplus of about US$20 billion every month, and it plans to issue 1.55 trillion yuan (US$204.07 billion) worth of special bonds to buy forex reserves from the central bank to finance its new overseas investment agency.

Related readings:  China's forex reserve tops US$1.2 trillion  $200b special T-bonds to tap forex reserves  US denies sell-off of treasuries Special bond issuance targets excess liquidity

Moreover, the US bond sale might be partly conducted by some Chinese banks instead of the central bank, although it's part of its preset strategy to diversify its forex reserve investment portfolio.

In January, China decided that a part of its forex reserves would be diverted to commercial investments with higher yields.

However, Zhao Xijun, finance professor with Renmin University of China, said that the country won't sell US treasuries in a large scale because it's a fairly good choice for investors. "It has better security and liquidity than many other investment options," he said.

The diversification of China's forex reserves will be gradual and won't hurt the dollar or financial markets, commented Ding Zhijie, deputy dean of the Financial Institute of the University of International Business and Economics.

Even if China reduces some of its US treasury holdings, Zhao said, the money may not flow out of the US soil. "It may be shifted to other fields, such as corporate bonds and the stock market."

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