China zoomed past the United Kingdom to become the largest overseas holder of JGBs then, the economists said.

The report said China's actual holdings of JGBs may be underestimated as a large portion of it is disguised under other accounts. It said that at the end of last year, Luxembourg had 12 trillion yen worth of JGBs, up nearly 50 percent from a year earlier, moving it ahead of the UK and the US to become the second-biggest holder of JGBs after China. Luxembourg's relaxed financial regulations makes it a haven for investors who want to keep their identities secret, the report said.

It also suggested that public opinion might have played a big role in China reducing its holdings of Japanese debt.

Ding Zhijie, dean of the Finance School at the University of International Business and Economics in Beijing, said concerns of direct exposure to the Japanese government's knowledge of its assets might explain why China hides part of its Japanese assets in other countries' accounts.

With bilateral tensions worsening, China is also apprehensive about the safety of its Japanese assets and wants to avoid any provocative action by the Japanese government, Ding said.

Both Ding and Xu denied reports that China was deliberately selling JGBs to maintain yields.

"China just reacted to the yen's depreciation and the reduced holding in itself is conducive for the yen's fall," Xu said.

London sees more yuan bonds on offer	Risks in bond market 'controllable'