The cash-rich Chinese government reduced its US Treasury bond holdings to 843.7 billion dollars in June, the lowest level since at least the same month last year, the Treasury said in a report on international capital flows.

The June data was lower than the 867.7 billion dollars in Treasury bonds held by the Chinese in May and 900.2 billion dollars in April.

China has repeatedly criticized the United States for its snowballing debt levels, fearing its investment in US government bonds could turn sour if a debt crisis erupts.

There are worries that if China, which remains the top foreign holder of US debt, continues to diversify away from US bonds it will become much harder for the United States to finance its mounting debt burden.

Some analysts also fear Beijing is secretly buying bonds via third countries to mask its importance as a creditor -- a role which had attracted considerable scrutiny.

Still, the decline in US bond holdings in June and May is "a sign that diversification has become a growing priority" by the Chinese government, said Kathy Lien, director of currency research at Global Forex Trading.

"China has been an aggressive buyer of Japanese yen throughout 2010 as well as a big buyer of euros," she said.

Beijing is reportedly turning bullish on Europe and Japan at the expense of the United States, whose recovery from a recession has slowed.

Beijing's aggressive diversification policy was also underscored by a former Chinese central bank advisor.

China has been buying "quite a lot" of Europe's bonds, Yu Yongding, an ex-advisor to the People's Bank of China, said in an interview with Bloomberg news agency.

Yu was part of a foreign-policy advisory committee that visited France, Spain and Germany from June 20 to July 2.

"Diversification should be a basic principle," Yu said, adding that a "top-level Chinese central banker" told him to convey to European policymakers China's confidence in the region's economy and currency.

"We didn't sell any European bonds or assets, instead we bought quite a lot."

China, which holds the world's biggest foreign reserves at 2.454 trillion dollars, has also stepped up purchase of Japanese debt.

For the first half of 2010, China bought 1.73 trillion yen (20 billion dollars) worth of Japanese debt, nearly seven times the full-year record of 253.8 billion yen in 2005, according to Japan's Finance Ministry.

The US government data Monday also showed Japan as continuing to be the second top foreign holder of US debt, followed by Britain.

Japan held 803.6 billion dollars worth of Treasury bonds in June, higher than the 786.7 billion dollars in May, while Britain had 362.2 billion dollars in US bond holdings, up from 350.0 billion dollars, according to the data.

Experts believe official data almost certainly understates Beijing's US government debt holdings and some say China-linked entities may be scooping up US bonds furtively on the London and Hong Kong markets.

"Even taking into account a modest... buying from UK and Hong Kong, commonly a source of central bank flow, China still appears to be a large seller," analysts at Nomura Securities said in a note.

"We will monitor this closely, especially given recent headlines of China buying euro and yen-based assets."

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