June 18, 2009 / 4:48 AM / in 10 years

China could yet buy more U.S. debt: former c.banker

BEIJING (Reuters) - China could still increase its holdings of U.S. Treasuries if the dollar is stable, even though the long-term trajectory is to diversify its foreign exchange reserves, a former central bank governor said in an essay.

A number of senior Chinese officials have voiced concern recently about Beijing’s exposure to U.S. debt, given what they see as a mounting medium-term risk of inflation in the United States.

About 70 percent of China’s $1.95 trillion in official foreign exchange reserves is held in dollar assets.

The article by Dai Xianglong, former head of the People’s Bank of China (PBOC) and currently chairman of China’s National Social Security Fund (NSSF), echoed similar comments he made last week that Beijing has little choice but to keep buying U.S. debt.

“It is still possible for China to increase its investment in U.S. treasuries at appropriate times,” Dai wrote in the article, published in the latest issue of China Finance magazine, which is backed by the PBOC.

But Dai said that it was not correct to “simply describe the current situation of China’s foreign-exchange reserve management as one of falling into a ‘dollar trap.’”

The World Bank said on Thursday that the pace at which China accumulates forex reserves will slow dramatically.

The bank expects they will rise by $218 billion this year after increasing by $419 billion in 2008 and $462 billion in 2007, as outward foreign direct investment increases and due to losses on foreign assets, repatriation of profits and “hot money” outflows.

Dai was governor of the PBOC from 1998 to 2002. The NSSF that he now heads is a fund of last resort for China’s patchwork of underfunded provincial pensions schemes.

Reporting by Jason Subler and Zhou Xin; Editing by Ken Wills

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