China could reduce its holdings of dollar assets because the country is concerned about the stability of the US economy. China's foreign exchange reserves add up to nearly $2.4 trillion by the end of 2009. Almost 70% of these reserves are dollar assets, according to various estimates.
However, if China was to dump its dollar assets, it could lead to a domino effect on other investors and consequently cause a depreciation of the rest of China's holdings. The country's total number of total US treasury securities declined to 20.9% from 23% in 2009. Sun Lijian state that, "While it is not clear that the selling is part of a consistent strategy, the country should keep a considerable proportion of dollar assets in its foreign echange reserves". There are many suggestions that China should use its growing reserves to buy resources, and technologies. The most important thing for China right now is to protect its financial stability.
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With the Chinese so involved in the U.S. economy it is not surprising that they are so worried about the affect on their own economy. Although this seems like a rather harsh measure take the Chinese have built an incredible economy so they must know what they are doing.
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