BEIJING China should sit tight on its U.S. Treasuries investment and adopt a "no buy, no sell" strategy, former top Chinese parliamentary official Cheng Siwei said on Monday as Asian stocks tumbled on a historic downgrade of U.S. debt rating.
Taking aim at how China should invest its $3.2 trillion in foreign exchange reserves, the world's largest, Cheng said China should use future reserves to buy other bonds and to make foreign direct investments.
Cheng's advice to Beijing, the largest foreign creditor to the United States, to stay calm contrasts with Monday's financial market rout as nervous investors fled riskier assets on fears a second U.S. recession may be looming.
"In my opinion, at this moment, the best strategy is no buy, no sell," Cheng told Reuters when asked what Beijing should do with its U.S. debt investment.
"At this moment, it's very difficult to shift (investment), to change fundamentally, because we hold such a big amount."
Analysts estimate 70 percent of China's reserves are invested in dollar assets, and data shows China had $1.16 trillion worth of Treasuries as of the end of May. As such, it is in Beijing's interests to see a healthy U.S. economy.
Even before Standard & Poor's hammered market confidence by stripping the United States of its top-tier AAA credit rating on Friday, Chinese analysts have urged Beijing to diversify its investment and cut it dollar dependence.
Cheng reiterated that stance by saying China could buy some euro zone sovereign debt, but ruled out any large investment.
"I don't think (China will buy) very big amounts. We will buy some according to our situation, our evaluation. But in this case, it's not only an economic or financial issue, also a political issue," he said.
With an eye on China's massive reserves, indebted European governments in Greece, Spain, Italy and Hungary have trooped to Beijing asking for investment in their sovereign debt.
So far, China has bought Greek bonds and has vowed to buy more if needed. It has never disclosed the size of its investment in the euro zone, although economists estimate a quarter of its reserves are held in euro investments.
Cheng, previously a vice-chairman of parliament with a rank equivalent to a vice premier, rattled the dollar and U.S. government bond markets in 2006 when he said China should trim its holdings of U.S. debt.
Many economists have argued that China needs to let the yuan rise if its wishes to slow its build-up of reserves and address its headache on how to manage trillions of dollars.
But repeating Beijing's long-held argument that too fast a rise in the yuan would hurt the export sector, China's biggest employment sector, Cheng rejected calls for a sharply stronger yuan.
"This is also a dilemma because if we appreciate the yuan very fast, it will cause a big impact on our falling trade," he said. "So I think ... the yuan will appreciate slowly but the direction is very distinct."
On its part, Beijing has steadily voiced support for the euro and the euro zone.
(Writing by Koh Gui Qing; Editing by Ken Wills)