China should reduce reliance on U.S. T-bills

<?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />China should be cautious in buying or selling huge amounts of U.S. Treasury bonds due to the inherent risks they pose, Cheng Siwei, an influential economist, said on Wednesday, suggesting that the suitable ceiling for the nation's foreign exchange reserves is 800 billion U.S. dollars.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

"The country should diversify its currency portfolio for foreign exchange reserves and reduce the share of U.S. dollar-dominated assets for risk control purposes," said Cheng, the former vice-chairman of the Standing Committee of the National People's Congress, in a speech at Fudan University.

The nation's foreign exchange reserves, the world's largest, climbed 453 billion U.S. dolars in 2009 to 2.4 trillion U.S. dollars. China is also the largest owner of U.S. Treasury securities and held 889 billion U.S. dollars of the securities by the end of January this year after scaling it down from $894.8 billion in December 2009.

Yi Gang, head of the State Administration of Foreign Exchange, said in March that the country's diversified allocation for foreign exchange reserves mainly include the US dollar, the euro, and the Japanese yen, without providing the currency composition of the holdings. However, analysts maintain that over 70 percent of the forex reserves are in US dollar-denominated securities.

"We could maintain the scale of forex reserves by increasing the overseas purchasing volumes to slash the trade surplus, and also spur more direct investment abroad," Cheng said.

Talking about the mounting pressure from countries like the United States on yuan appreciation, Cheng said China should keep the yuan exchange rate "basically stable at reasonable levels" but with more flexibility.

"Don't make the valuation of the Chinese currency too political ... the rate fluctuation will directly impact the global trade framework and impede the progress of the global economic recovery," he said.