China increased its holdings in U.S. Treasury securities by $7.3 billion in May for the second straight month, after five consecutive months of declines, said the U.S. Treasury Department. China retained its position as the largest foreign holder of the securities with $1.16 trillion in its portfolio.

Meanwhile, the second largest foreign holder Japan continued its net buying, increasing its holdings by $5.5 billion to $912.4 billion.

Given uncertainties hanging over the U.S. economy and rising government indebtedness, worries abounded about safety of China's Treasury holdings.

"China faces a dilemma in its holding of the Treasury securities," said Dong Yuping, an economist with the Institute of Finance and Banking at the Chinese Academy of Social Sciences.

"The country has no other choice but to continue buying into securities because the U.S. government debt remains the most liquid investment product in the market," he said.

China's foreign exchange reserves rose by a faster-than-expected 30.3 percent year on year to reach $3.1975 trillion at the end of June.

The international credit rating agency Moody's Investors Service has placed the U.S. Treasury securities on review for a possible downgrade. Risks of a default on U.S. Treasury securities, traditionally seen as the world's safest investment, have increased since the government reached its legal borrowing limit of $14.294 trillion on May 16.