UPDATE 2-China calls for global cooperation on debt risks

Fri Aug 5, 2011 5:23am EDT

* China Foreign Minister says U.S. debt risks are growing

* Urges global coordination to tackle economic problems

* Calls on U.S. to protect dollar investment

* Says supports Europe and the euro (Adds background)

BEIJING, Aug 5 (Reuters) - China's Foreign Minister called on Friday for more global cooperation to resolve U.S. and euro area debt problems as stock markets around the world tumbled on fears another financial storm may be developing.

The minister, Yang Jiechi, said U.S. debt risks were escalating and he called on Washington to protect dollar investments and adopt "responsible" monetary policies.

China has a major stake in the future of the dollar. Analysts estimate about 70 percent of its $3.2 trillion in foreign reserves is invested in dollar assets, making it the United States' biggest foreign creditor.

"Europe's debt problems are still developing, and the U.S. sovereign debt default risk is escalating," Yang told the media in Poland, where he is on an official visit.

"All countries must further increase communication and coordination, push ahead reforms in the global financial system, and improve governance of the global economy."

World stocks fell for the eighth straight session on Friday on fears that Europe's debt crisis could spin out of control and that the U.S. economy may slide into another recession.

Such a scenario could leave the weight of global economic growth on China, although Beijing's ability to provide fresh stimulus is limited by its need to fight inflation, which reached a three-year high in June.

As it stands, China could account for over a third of world economic growth this year, said Liu Ligang, an ANZ economist.

Despite the euro area's debt woes, China's foreign minister reiterated Beijing's confidence in Europe, its top trading partner, and the euro .

"We have bought many euro bonds in recent years and will continue to support Europe and the euro as always in future," he said.

He urged Washington to "ensure the safety" of foreign dollar investment.

"We hope the United States can enact responsible monetary policies to maintain a trend of global economic recovery," he said. "A stable U.S. dollar as a major global reserve currency is very significant to global economic and financial conditions."

CHINA'S DOLLAR RISKS

Underlining Beijing's growing unease with dollar risks, China Central Bank Governor Zhou Xiaochuan asked Washington this week to deal responsibly with its debt, saying a choppy Treasury market endangers the world.

Washington averted a debt default this week by agreeing to cut fiscal spending, a deal that opened the way for an increase in the government's borrowing limit. Still, Washington may need to do more to stabilise its finances longer term to stave off the risk of losing its top-notch AAA credit rating.

More Chinese are lobbying for Beijing to tackle its dollar woes by slowing down the pace of growth in its reserves and by investing its dollars in other asset classes, such as equity.

"We have recommended the Chinese government negotiate with the United States to convert part of its Treasury holdings into equity stakes in U.S. financial or energy firms," said Jing Xuecheng, a former deputy head of research at the central bank.

Jing, who now runs his own research institute, said U.S. equity markets are large and liquid enough to absorb any larger-sized sales that Beijing could make in future.

Others said China should address the heart of its dollar headache by freeing the tightly controlled yuan and let it rise.

A government economist with China's top economic planning agency, who declined to be identified, said Beijing should allow more Chinese investors and firms to invest abroad. That would reduce the need for the central bank to buy so many dollars flowing into the country and so slow growth in reserves.

Yu Yongding, a former academic member of the monetary policy committee at China's central bank, went further and called on Beijing to float the yuan.

"If there is any lesson China can draw from the U.S. debt ceiling crisis, it is that it must stop policies that result in further accumulation of foreign exchange reserves," he wrote in an article in the Financial Times.

CHINA TO THE RESCUE?

China's growth during the global financial crisis, helped by a massive stimulus programme, helped offset the dramatic slide in economies elsewhere.

With fears that global growth may falter once again, many investors are pinning their hopes on China to pick up some of the slack.

But some analysts say Beijing may not be in a position to launch another massive fiscal stimulus to aid growth, as it did in 2008, because it would almost certainly fuel already high inflation.

Beijing has pulled every lever at its disposal to try to brake economic growth, yet the price pressures persist.

China's inflation likely ran at 6.3 percent in July, just a whisker below three-year highs of 6.4 percent in June, a Reuters poll shows. That argues for Beijing to at least keep monetary policy tight.

And as far as purchasing sovereign debt is concerned, cash-rich Beijing may not be as keen a buyer as some nations hope.

Italian Economy Minister Giulio Tremonti said on Thursday that Asian investors are reluctant to buy Italian bonds because it sees they are not being bought by the European Central Bank.

Tremonti's remarks come after a source told Reuters Italian Treasury chief, Vittorio Grilli, is in Asia as part of a regular visit to talk to investors about buying Italian bonds.

When asked if Beijing is keen to buy Italian debt, China's central bank declined to comment on Friday. (Reporting by Langi Chiang and Koh Gui Qing; Editing by Ken Wills and Neil Fullick)

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