Treasuries purchases will depend on risk: China's Wen

LONDON Sat Jan 31, 2009 1:52pm EST

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LONDON (Reuters) - Future purchases of U.S. Treasuries by China will depend on its need to protect the value of its foreign investments and a stable yuan is in everyone's interests, Chinese Premier Wen Jiabao said on Saturday.

The United States said this month that all its major trading partners should operate flexible exchange rates, expressing concern that China was manipulating the value of the yuan to boost its exports.

But analysts say there may be a limit to the pressure that the United States can put on China as it is the single biggest foreign investor of U.S. Treasuries, with $681.9 billion as of November, according to U.S. data.

"This is a very sensitive question and a question that President Barack Obama will want to ask," Wen said at an event in London in response to a question over future Chinese demand for U.S. government bonds.

"In recent years, our foreign reserves have been growing very fast. We are trying to bring more diversification to the holdings of the foreign exchange reserves. Buying U.S. Treasuries bonds is a major part of it.

"Whether we will buy more U.S. Treasury bonds, and if so by how much -- we should take that decision in accordance with China's own need and also our aim to keep the security of our foreign reserves and the value of them."

CURRENCY ROW

Concerns that China may lose its appetite for buying Treasuries have helped depress U.S. government debt prices, along with worries about the slew of bonds that will be needed to finance the next U.S. economic stimulus package.

Analysts fear the escalating currency row, if it results in China buying fewer Treasuries, will make it more expensive for the United States to service its long term debt.

Wen said keeping China's currency at a steady level was good for the global economy.

"In the financial crisis, it is all the more important to maintain the stability of the yuan exchange rate in a reasonable and balanced level, this is not only in the interests of the China but also in the interest of the world economy," he said.

Wen is in London for talks with Prime Minister Gordon Brown as part of a European tour aimed at building a consensus ahead of the G20 London financial crisis summit in April and improving relations between the trading partners.

Brown is likely to raise the issue of trade and currency imbalances as an obstacle to economic recovery and also urge China to do more to boost demand in its own economy to ease the severity of the global downturn.

Wen joined the growing number of world leaders denouncing protectionism as a response to worsening economic conditions.

"There is a tendency that some people only care about their own business or, even worse, they pursue their self interest at the expense of other people's interest," he said.

"But protectionism in the long run will harm the global economy. The Chinese government has no interest in having a trade surplus. It will not adopt trade protectionism."

(Reporting by Daisy Ku, Writing by Matt Falloon; Editing by Elizabeth Piper)

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