Despite the global credit crunch, China increased its U.S. Treasury bonds holdings to $541 billion by the end of August, making it the second largest holder of U.S. government debt.

China bought $22.3 billion in U.S. Treasury bonds in August alone, the biggest single month accumulation this year, according to the U.S. Treasury Department.

By contrast, Japan sold $7.5 billion worth of U.S. Treasury bonds in August and has increased its holding of American debt issues by only $4.7 billion so far this year. Now China is likely to overtake Japan as the largest U.S. Treasury bondholder, market analysts said.

The U.S. dollar rebounded in July, tempting other nations to regain their confidence in the U.S. economy. A research report issued in mid-October by China International Capital Corp. Ltd., a leading investment banking institution based in Beijing, urged the government to buy U.S. Treasury bonds so that the country could benefit from rising bond prices and a possible dollar appreciation before other nations did the same.

But the worsening financial situation and the collapse of Lehman Brothers Holdings Inc. in particular, led to another round of dollar depreciation.

The global financial crisis has taken its toll on major world economies. They are in desperate need of cash to finance their banking and brokerage institutions. China, on the other hand, is less affected thanks to its abundant liquidity and conservative banking operations.

Developed countries whose financial markets were shattered by the credit crunch are lobbying hard for China's participation in a global rescue effort.

"What China can do, and is going to continue to do, is to try to promote policies that stabilize growth in China and continue to act as a responsible and stable actor in the broader international systems," said U.S. Treasury Undersecretary David McCormick in Shanghai on October 21.

Analysts interpreted his words partly to mean that China would buy more U.S. Treasury bonds in the wake of the U.S. Government's $700-billion bailout plan for the country's financial institutions.

Yu Yongding, Director of Institute of World Economics and Politics under the Chinese Academy of Social Sciences, said in an interview with 21st Century Business Herald that the United States would need no less than $1 trillion to salvage its crumbling financial markets. To raise the money, the U.S. Government would issue more Treasury bonds and print more greenbacks, he said.

"Each alternative can damage the interest of creditor nations," Yu said. "The more you buy, the more you will lose." He urged the Chinese Government not to buy any more U.S. Treasury bonds.

But some analysts said China has no better choice than to keep investing its swelling dollar reserves in U.S. Treasuries. While the American economy has been undermined by the property bubble, EU nations have received a heavier blow from the U.S. financial market debacle, making euro assets bad investments for China, said a person close to the State Administration of Foreign Exchange who preferred to be anonymous.