[NYTr] China backs off threats against dollar

[All the News That Doesn't Fit]

Reuters - Aug 12, 2007
http://www.reuters.com/article/ousiv/idUSPEK13834920070812

China backs off threats against dollar

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.