China can reduce its holdings of dollar assets, but should not "overdo" it as the country tries to adjust the structure of its dollar asset-dominated foreign exchange reserves, analysts said.

The country's foreign exchange reserves amounted to nearly $2.4 trillion by the end of last year — a third of the global total — raising concerns that the massive scale of the holdings could backfire.

About 70 percent of the reserves are dollar assets, according to various estimates by scholars, and the high proportion means that once the dollar's value slumps, China will incur huge losses.

But it is equally difficult for China to dump its dollar assets because that could lead to a domino effect on other investors and cause depreciation of China's holdings.

"China is in a dilemma," said Dong Yuping, economist at the Chinese Academy of Social Sciences.

According to the latest US Treasury International Capital (TIC) data, China was a net seller of US Treasuries in December, cutting its holdings by $34.2 billion to $755.4 billion.

China's share of total outstanding short- and long-term US Treasury securities among foreign holders declined to 20.9 percent in December from 23 percent in mid-2009, yielding its position as the largest investor in US treasuries to Japan.

"The data suggest that China could be more actively diversifying its currency reserves away from US Treasuries," said Jing Ulrich, managing director and chairman of China Equities and Commodities, J.P. Morgan. "We expect the country might be marginally shifting some exposure to other currencies."

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 exchange reserves, said Sun Lijian, economist with the Fudan University.

"China should not overly reduce its dollar assets, given their high market liquidity," he said. Dollar assets are relatively easy to sell if China needs quick money to safeguard its financial stability, he said.