China should trim its holdings of U.S.
debt, a senior Chinese official said, rattling markets on
Tuesday in the run-up to a visit by President Hu Jintao to
Washington this month.
As China is a leading financier of the U.S. current account
deficit and holds the world's largest foreign exchange
reserves, the comments from Cheng Siwei, a vice chief of the
national parliament, sent the dollar and U.S. government bonds
The comments could add to the contentious issues that will
come up during Hu's visit, notably what some U.S. politicians
and companies see as currency manipulation by China, accused of
holding down the yuan to gain an unfair trade advantage.
Hong Kong's Beijing-funded Wen Wei Po newspaper carried
Cheng's comments, made in Hong Kong on Monday.
"China can stop buying dollar-denominated bonds, increase
buying of U.S. products and gradually reduce its holdings of
U.S. bonds," the newspaper quoted him as saying. "But all these
must follow the prescribed order," he added, without
Despite rising short-term interest rates, longer-term debt
yields in the United States are exceptionally low by historical
standards. Any move by China to sell some of its massive debt
holdings could drive up long-term rates, which ultimately could
make it costlier for Americans to take out home mortgages.
However, an official at China's central bank said Cheng was
merely giving a personal opinion and a reporter present for the
speech said Cheng had stressed he was expressing his own views.
"The comments only reflected his academic view. The
People's Bank of China has been studying issues regarding the
management of foreign exchange reserves," the central bank
official told Reuters.
Cheng is one of more than 10 vice chiefs of the parliament,
as well as chairman of the China Democratic National
Construction Association, one of eight minor political parties
loyal to the Communist Party.
His rank is equivalent to vice premier, outranking cabinet
ministers, and he often speaks on economic issues, but he does
not exercise direct control over government policy.
"Cheng Siwei is a scholar and at the same time a national
leader," said Zhang Zuhua, a former official familiar with the
workings of the government. "He often expresses his views as an
expert, and doesn't just give bureaucratic talk.
VISIT TO WASHINGTON
Hu meets U.S. President George W. Bush in Washington on
April 20. U.S. officials say Hu's visit will focus on trade
issues as the Bush administration seeks to narrow its trade gap
with China, which hit a record $202 billion in 2005.
Analysts say China has been gradually diversifying away
from dollar assets in its foreign exchange reserves but fears
of a collapse in the U.S. currency will prevent it from making
any dramatic shift.
It has been a big buyer of U.S. government bonds, helping
to finance the U.S. current account deficit and keep American
interest rates low. Investors watch closely for any sign that
Beijing might shift the government's investment mix.
Central bank chief Zhou Xiaochuan said last month that
China would adjust the mix of its reserves in light of global
market conditions. In doing so, China's criteria would be
safety, liquidity and profitability, in that order.
China's foreign exchange reserves hit $854 billion at the
end of February, Premier Wen Jiabao said in a speech published
in the official People's Daily on Tuesday, confirming a
previously reported figure.
China held $262.6 billion of U.S. Treasuries as of January,
dwarfed by Japan's holding of $668.3 billion, according to U.S.
Chinese officials have denied reports they plan to cut the
current volume of dollar assets and analysts say China may have
to buy more U.S. assets as the country's foreign exchange
reserves have been growing rapidly, driven by the inflows of
dollars from its trade surplus, foreign investment and hot
The central bank buys dollars to ensure the yuan
does not rise too sharply after last year's landmark
revaluation. Those dollars, along with assets in other foreign
currencies, accumulate in its reserves.
Cheng also said China should widen the yuan's trading band
at an appropriate time, the newspaper said.
But China must keep the yuan "relatively" stable in the
near term and avoid an "excessively" high rise in foreign
exchange reserves, he said.
The country would make the yuan fully convertible in the
longer term, but it still did not have a timetable, Cheng said.
© 2006 Reuters Ltd.