September 16, 2010 / 9:15 AM / 7 years ago

China should cut dollars if U.S. too loose: sovereign fund

BEIJING (Reuters) - China should sell dollars and diversify its foreign exchange reserves if the United States sticks to loose monetary policy, the head of the Chinese sovereign wealth fund said in an article published this week.

Lou Jiwei, chairman of the $300 billion China Investment Corp, also offered policy advice to the United States, saying the best course of action would be for it to tighten monetary conditions while ramping up stimulus spending.

He said the United States did not have much to gain from monetary easing, because little cash was entering the real economy and a large amount was leaving the country via dollar-funded carry trades.

Under such conditions, the dollar would steadily depreciate, and Asian economies and oil exporters might lose faith in it as a global reserve currency, he said.

"For China, the chief tools to reduce economic risks are to strengthen regulation of capital flows, control liquidity through cash management, monitor asset markets and divert foreign exchange reserves to non-dollar assets," Lou said.

The article was published this week as part of a book for the Second Summer Palace Dialogue, a meeting of American and Chinese economists that took place in Beijing.

It appeared that Lou had written the article at least several months earlier, but this was the first time that it had been published.

There is evidence that China has, in fact, stepped up its pace of foreign exchange diversification this year, cutting back its vast holdings of U.S. Treasuries and buying record amounts of Japanese and South Korean debt.

But Lou said that it was not too late for the dollar. A move toward tighter monetary policy would reduce expectations of depreciation, restrain the dollar-funded carry trade and support global financial stability, he said.

For the U.S. economy, tighter monetary policy could also pay unexpected dividends, he said.

"If the dollar carry-trade lessens and capital from Asian countries and oil-exporting countries continues to flow to the United States, then liquidity in the United States might even increase," he said.

Reporting by Simon Rabinovitch; Editing by Jacqueline Wong

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