By Xin Zhiming (China Daily)
Updated: 2007-08-13 06:55

The US dollar plays an important role in the global monetary system and dollar assets are an important part of China's foreign exchange reserve, the central bank said yesterday.

The announcement by the People's Bank of China (PBOC), experts said, should scotch rumors that Beijing would sell off its US dollar reserve in response to Washington's pressure to revaluate the yuan.

"The US financial market is huge and has high liquidity, and the dollar assets, including US government bonds, are an important component of China's foreign exchange reserve investment," Xinhua quoted a PBOC official as saying.

Last week, the UK's Daily Telegraph reported that two Beijing "officials" had sent an "economic threat" saying China could "liquidate its vast holding of US treasuries if Washington imposes trade sanctions to force a yuan revaluation".

The newspaper said the remarks were in response to the passage of a bill by the US Senate Finance Committee last month that would impose higher trade tariffs on China-made goods if Beijing refused to revalue the yuan at a faster pace.

Economists Xia Bin and He Fan, of the State Council Development Research Center and the Chinese Academy of Social Sciences, were quoted as saying that if Beijing triggered a dollar crash now, when the US dollar is weak, it could cause a spike in US bond yields, ruin that country's housing market and even slow down its economy.

US officials responded strongly to the report because Washington has been struggling with the financial mess caused by the sub-prime mortgage crisis.

The PBOC official's statement ruling out any such threat said China, which had a foreign exchange reserve of $1.33 trillion by the end of June, is a responsible investor in the international capital market.

"For China, safety, liquidity and investment returns are the main targets of its foreign exchange reserve management," the official said.

"In deciding the portfolio of the currency assets structure, (we) have consistently stuck to a long-term, strategic policy, taking into consideration multiple factors such as China's foreign economic development, evolution of the international monetary system, as well as changes in the international capital and foreign exchange markets."

The official called for dialogue and exchanges to enhance bilateral understanding.

"The close economic and trade relations between China and the US play an important role in the stable economic development of the two countries, as well as the world economy," the official said.

China attaches great importance to strengthening bilateral communication and exchanges, including the Sino-US strategic economic dialogue, to reach a consensus, he said.

(China Daily 08/13/2007 page1)