China backs off threats against dollar


From Reuters
Saturday, August 11, 2007

BEIJING -- China on Sunday delivered a vote of confidence in the dollar, saying dollar assets form an important part of its foreign exchange reserves and the U.S. currency plays a prominent role in the global monetary system.

The comments, made to the Xinhua news agency by an unidentified central bank official, follow a report last week by a British newspaper suggesting that Beijing could dump its vast dollar holdings if a trade war broke out with Washington.

"U.S. dollar assets, including American government bonds, are an important component of China's foreign exchange reserves as the dollar enjoys a major position in the international monetary system based on the large capacity and high liquidity of U.S. financial markets," Xinhua quoted the official as saying.

Britain's Daily Telegraph said on Wednesday that "the Chinese government has begun a concerted campaign of economic threats against the United States," and was hinting that it might liquidate its holdings of U.S. Treasuries if Washington imposed trade sanctions.

The story caused a stir in global markets. U.S. President George W. Bush said China would be foolhardy to dump dollars, while the top Republican on the U.S. Senate Finance Committee wrote to the Chinese ambassador seeking clarification.

Asked about the newspaper report, the central bank official said: "China is a responsible investor in the international capital markets."

His comments follow concerted liquidity injections on Thursday and Friday by global central banks to soothe investors' fears that spreading losses stemming from investments in subprime U.S. mortgages could snowball into a global credit crunch.

Restating official policy, the official said Beijing's priorities in managing its $1.33 trillion in foreign currency reserves were safety, liquidity and investment returns -- in that order.

He said China had always taken a long-term, strategic view in its reserves management that took account of the changing trends in the global capital and foreign exchange markets.

"The close economic and trade relations between China and the United States play an important role in the stable development of the two countries' economies and the world economy as well," the official told Xinhua.

The Daily Telegraph said recent remarks by Xia Bin and He Fan, two senior economists at Chinese government-backed think tanks, were the first time Beijing had warned that it might use its foreign reserves as a political weapon.

Analysts and traders in China played down the two economists' remarks. They did not believe the comments indicated any change in Beijing's official policy and said their remarks in any case were not new.

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