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Second, to manage its Treasuries' reserve, China needs to take US interests into account. Correspondingly, the US should shoulder its responsibility of stabilizing its currency. They have to do this because the economic and trade relations between them are so close that neither can afford to jeopardize bilateral strategic partnership.
Third, given the record growth in China's foreign exchange reserves, it should now consider increasing its gold reserve.
In fact, after Lehman Brothers went bankrupt in 2008 and triggered the global financial crisis, China should have used more of its foreign exchange reserves to buy gold, especially because its gold reserve was relatively small at that time.
Although China has been increasing its gold reserve since 2003, it remains trivial compared with its massive foreign exchange reserves. And because China now faces the challenge of having large foreign exchange reserves, its monetary authorities have more than enough reason to increase the country's gold reserve.
If China continues to accumulate more foreign exchange reserves, the international gold price may soar. Hence, the fourth advice is that China should retain (or increase) its reserves of US Treasuries on a balanced scale, because a drastic rise in the international price of gold can cause serious harm to the US currency.
China is thus protecting US interests and the international monetary system, which is still dominated by the dollar, by increasing its reserve of US Treasuries. But China has to be cautious against holding excessive amounts of US Treasuries, because it has to bear part of the shock if the price of gold rises drastically.
Last, it is important for China to maintain harmonious international relations. The rapid expansion of China's economy has increased its influence in the global community. If China, as the top US creditor, dumps its Treasuries reserve, the international community will probably be forced to indulge in panic selling and thus trigger a dollar crisis.
Such a move can hurt relations between China and the US.
Besides, it would be inconsistent with China's diplomatic policies, and weaken the country's economy and security. Therefore, China should weigh the pros and cons carefully before it disposes of the US Treasuries.
The author is a research scholar with the Chinese Academy of International Trade and Economic Cooperation, affiliated to the Ministry of Commerce.
(China Daily 01/14/2011 page9)