2010-07-07 14:00

BEIJING - China on Wednesday ruled out the "nuclear" option of dumping its vast holdings of US Treasury securities but called on Washington to be a responsible guardian of the dollar.

In the third in a series of statements explaining its work to the Chinese public, the State Administration of Foreign Exchange sought to allay concerns in the outside world that arise whenever Beijing shifts its holdings of US government debt.

"Any increase or decrease in our holdings of US Treasuries is a normal investment operation," SAFE, the arm of the central bank that manages China's official currency reserves, said.

It said it constantly adjusts its portfolio to maximimize returns, and any changes to its US Treasury portfolio should be seen in that light and not interpreted politically.

In a series of questions and answers posted on its website, www.safe.gov.cn, SAFE asked rhetorically whether China would use its $2.45 trillion stockpile of reserves, the world's largest, as a "nuclear weapon."

SAFE said such concerns were completely unwarranted.

"The US Treasury market is the world's largest government bond market, and US Treasury bonds deliver fair good security, liquidity and market depth with low transaction costs.

"The US Treasury market is a very important market for China," the agency said.

Bankers say China's total holdings of dollar-denominated assets accounts for perhaps two-thirds of its reserves.

Gold not the answer

SAFE also gave a qualified vote of confidence to the dollar.

The agency acknowledged that financial markets were very concerned at one point that massive US government borrowing would drive the US currency lower.

But it said economic conditions elsewhere were also a factor in determining the dollar's trend. The euro zone, for instance, was struggling with high government debt levels.

"We must recognize that any depreciation of the dollar is relative to other countries, and other countries or regions also have this or that problem," SAFE said.

One of the prime concerns of Chinese Internet commentators is that a long-term decline in the dollar or euro will erode the value of SAFE's portfolio.

To that end, SAFE called on the United States and other major countries to take "responsible measures" to maintain the value of their currencies. This meant withdrawing monetary stimulus in a reasonable manner and relying less on deficit spending.

SAFE was lukewarm about gold as an investment.

"It cannot become a main channel for investing our foreign exchange reserves," the agency said, noting the size of the gold market was limited and prices were volatile.

Buying more gold would also not help much in diversifying China's reserves.

China has increased its gold holdings by more than 400 tonnes in the past few years to 1,054 tonnes. Even if it doubled that amount gold's share of SAFE's portfolio would increase by only one or two percentage points.

"SAFE will never be a speculator. It mainly seeks to protect the safety of China's FX reserves and ensure a stable investment return," it said.

The agency said it was a financial investor and did not seek management control when it made equity investments.

Answering the question on whether it has bought into stocks, private equity funds or any other higher-risk instruments, SAFE said its never excludes any investment.

"It depends on whether a product meets SAFE's demand for safety, liquidity and a stable yield for its FX reserves, and whether it can help SAFE diversify risks," the agency said.