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Nation may hike US debt in short term

(China Daily)
Updated: 2009-06-19 09:26

China could still increase its holdings of US Treasuries if the dollar is stable, even though the long-term trajectory is to diversify its foreign exchange reserves, a former central bank governor said in an essay.

The nation will need some time to diversify its foreign- exchange reserve holdings and the US government should take "substantial" measures to honor its promise of ensuring the safety of foreign investments, Dai Xianglong, former head of the People's Bank of China (PBOC) and currently chairman of China's National Social Security Fund (NSSF), wrote in an article in the Chinese-language publication China Finance.

China's yuan will "surely become a significant currency for international reserves after years of efforts". The gradual process will include letting foreign governments and businesses obtain the currency through loans, yuan-denominated bond sales in China, trade payments and currency-swap agreements, according to Dai's article.

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The government is pushing for the opening up of China's capital accounts to expand the nation's outbound investments, Dai wrote. Eleven such accounts, out of a total 43 monitored by the International Monetary Fund, remained unconvertible as of March.

A number of senior Chinese officials have voiced concern recently about Beijing's exposure to US debt, given what they see as a mounting medium-term risk of inflation in the US.

About 70 percent of China's $1.95 trillion in foreign exchange reserves is held in dollar assets.

The article echoed similar comments he made last week that Beijing has little choice but to keep buying US debt.

"It is still possible for China to increase its investment in US Treasuries at appropriate times," Dai wrote in the article in China Finance magazine, which is backed by the PBOC.

But Dai said that it was not correct to "simply describe the current situation of China's foreign-exchange reserve management as one of falling into a 'dollar trap'".

Reuters-Bloomberg