China keeps faith with U.S. Treasuries: central banker

BEIJING Mon Mar 23, 2009 5:46am EDT

BEIJING (Reuters) - China will continue to buy U.S. government debt, viewing the credit risk as low overall, a senior central bank official said on Monday.

The Federal Reserve's decision last week to buy $300 billion of U.S. Treasury bonds, with the aim of kick-starting growth by lowering interest rates, has fanned worries that the central bank may undermine the dollar and eventually stoke inflation, leading to a bear market for bonds that would be costly for China.

But Hu Xiaolian, a vice governor of the People's Bank of China, said:

"Investing in American Treasuries, as an important part of our foreign exchange reserve management, will continue."

Premier Wen Jiabao said on March 13 that he was worried about China's heavy exposure to the United States. Bankers assume about two-thirds of China's nearly $2 trillion in reserves is parked in dollar assets, primarily U.S. government and other bonds.

Hu, who is also head of the State Administration of Foreign Exchange, said China would pay close attention to changes in the value of its Treasury holdings.

"U.S. Treasuries are an important part of our foreign exchange reserves. So we naturally care about the security and investment return on U.S. Treasuries," she told a news conference on China's preparations for next month's G20 summit in London.

Turning to the dollar, Hu distanced herself from the argument heard in some circles that the U.S. economy and markets were in such deep trouble that the dollar's global supremacy was under threat.

A senior Russian government source said last Thursday that China and other emerging nations backed Russia's call for a discussion on how to replace the dollar as the world's primary reserve currency.

Hu said research into a multi-polar global currency system could begin but the dollar remained the key currency for trade, settlement, payments and pricing. The dollar also dominated financial investment.

"We may start studies and discussions about a multi-currency regime, but realistically we should focus more on enhancing supervision of the dollar-led currency system, particularly the financial and economic situation of major reserve-currency countries," she said, alluding primarily to the United States.

On the currency composition of China's reserves, Hu said Beijing took long-term factors into account such as the structure of China's payments and trade; the risks and returns on various currencies; and the liquidity of different currencies.

China would not be swayed in determining the make-up of its portfolio by short-term volatility in currency markets, she said.

"In China's forex reserves, we always take the approach of diversifying our investments, which include not only the U.S. dollar but also the euro and yen as well as other currencies," Hu said.

(Reporting by Zhou Xin and Simon Rabinovitch; Editing by Jason Subler)

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