The nation will continue buying US government debt but pay close attention to possible fluctuations in the value of the assets, a vice-governor of the central bank said yesterday.
Investing in US Treasury bills is "an important component of China's foreign currency reserve investments," People's Bank of China Vice-Governor Hu Xiaolian told a news conference about President Hu Jintao's participation in the G20 financial summit in Britain next week.
"We are naturally concerned about the safety and profitability of US government bonds," she added.
The nation's reserves hit a record $1.95 trillion at the end of 2008, the largest in the world and far exceeding those of Japan, the second-largest foreign exchange holder, which had $1.03 trillion.
Beijing is also Washington's biggest foreign creditor, holding an estimated $1 trillion in government debt.
Hu Xiaolian made the remarks in response to worries that rising debt to fund Washington's stimulus package could stoke inflation and weaken the dollar, which would erode the value of the assets.
US central bankers decided last week to buy as much as $300 billion of long-term Treasuries and more than double mortgage-debt purchases to $1.45 trillion, aiming to lower home loan and other interest rates. With the purchases of Treasuries and housing debt, Fed chief Ben Bernanke is effectively using the Fed's powers to print money. Some analysts said that by doing so, he has signed the death warrant for the US dollar.
But Hu Xiaolian said that the credit risk in continuing to buy US Treasuries is low in overall terms.
Given that the US dollar is still the leading currency for international settlements, valuation and payment of trade, China will pay closer attention to the supervision of the international monetary system based on the US dollar, she said.
Her comments follow remarks earlier this month from Premier Wen Jiabao, who said he was "a little worried" about China's holdings of US government debt.
China's investments are likely to be a major topic of discussion when President Hu Jintao meets with his US counterpart Barack Obama on the sidelines of the summit in London.
The meeting will be the first face-to-face encounter between the two leaders.
Hu Xiaolian also said China is ready to support the International Monetary Fund (IMF) if it decides to raise capital through bond issuance.
She said that China is considering lending a hand to the IMF now that it is exploring new channels to raise money, including bond issuance, to deliver prompt assistance to countries struck by the global crisis.
Although Chinese officials believe that in the long run, expanding subscription from member nations is the principal channel of financing for the IMF, they think bond issuance would be an "efficient supplement" given the dire situation at the moment.
China would "warmly welcome" the bond issue, Hu Xiaolian said, adding they are expected to provide safe and reasonable investment returns. "Once the IMF decides to issue bonds, China will consider buying."
Should the IMF issue bonds, it would be the first time in the fund's history. The fund has so far largely been dependent on subscription from member nations.
In the past, the US and Europe have blocked attempts by the IMF to issue bonds, for fear that the fund could become too independent of their direction, the Wall Street Journal reported earlier, citing former IMF chief economist Michael Mussa.
At the same conference yesterday, Vice-Finance Minister Li Yong said that the government is also considering buying bonds issued by the International Finance Corporation (IFC), a subsidiary of the World Bank, to help finance developing countries fighting the global recession.