What China can do to ease global storm

By Eadie Chen and Simon Rabinovitch - Analysis

BEIJING (Reuters) - China, the world's biggest holder of currency reserves, may yet play an important part in calming a global financial storm from which it is largely sheltered.

Premier Wen Jiabao, who has promised to "join hands" with other nations to tackle the deepest financial crisis since the Great Depression, says the biggest contribution China can make is to keep the world's fourth-largest economy humming.

To that end, China has already cut interest rates and is expected to do so again. Yet speculation is swirling that Beijing could also chip in with a vote of confidence by pledging to hold onto its vast dollar assets and even buy more to help fund the massive bailout of the U.S. financial system now under way.

"For the sake of long-term U.S.-China relations, for the sake of China presenting a better image, I think China should stand up and say that it supports the U.S. dollar and is buying Treasuries," said Tao Xie, an expert on U.S.-China relations at the Beijing Foreign Studies University.

On one level, doing so would be very much in China's self-interest. Perhaps two-thirds of its $1.81 trillion in foreign exchange reserves is in U.S. Treasury and other bonds, and there was much hand-wringing during the dollar's slide earlier this year at the hefty losses Beijing was incurring.

"The dollar assets are held hostage. Dumping them is in nobody's interest," said Ding Zhijie, a finance professor who advises the government on foreign exchange management.

CHINA'S PREDICAMENT

On the other hand, there is a strong current of opinion in official circles that America has only itself to blame.

A leading state newspaper said on Tuesday that China should not foot the bills for U.S. woes, while a commentary on Wednesday lashed Washington for its lax, short-sighted monetary policy.

And China's state-owned banks and its sovereign wealth fund, stung by losses on earlier investments, have conspicuously kept their hands in their pockets while Japanese financial firms have bought into Wall Street's fallen or ailing giants.

"China is an unavoidable predicament. It will eventually have to buy U.S. Treasuries, but it should do this in exchange for something from the United States," said Mei Xinyu, a senior researcher at the Commerce Ministry.

As a quid pro quo, researchers suggested, Beijing should press Washington to open U.S. markets wider to Chinese firms, take concrete steps to stabilize the dollar and help China wield more power in bodies such as the International Monetary Fund.

Muddying the debate is the politics of Taiwan, a renegade island over which China claims sovereignty.

Plans unveiled by the Pentagon on Friday to sell around $6.5 billion in arms to Taiwan triggered a furious response in China.

"The probability that China will come out openly to say it supports U.S. Treasuries has been reduced by the announcement of the U.S. arms sale to Taiwan. When an issue comes up related to Taiwan, China tends to pick Taiwan as more important than whatever else, even the economy," said Xie.