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China may still buy US debt if dollar firm

China could still increase its holdings of United States Treasuries if the dollar is stable, even though the long-term trajectory is to diversify its foreign exchange reserves, a former central bank governor said in an essay.

A number of senior Chinese officials have voiced concern recently about Beijing's exposure to US debt, given what they see as a mounting medium-term risk of inflation in the US.

About 70 percent of China's US$1.95 trillion in official foreign exchange reserves are held in dollar assets.

The article by Dai Xianglong, former head of the People's Bank of China and currently chairman of China's National Social Security Fund, echoed similar comments he made last week that Beijing has little choice but to keep buying US debt.

"It is still possible for China to increase its investment in US treasuries at appropriate times," Dai wrote in the article, published in the latest issue of China Finance magazine, which is backed by the central bank.

But Dai said it was not correct to "simply describe the current situation of China's forex reserve management as one of falling into a 'dollar trap.'"

The World Bank yesterday said the pace at which China accumulates forex reserves will slow dramatically.

The bank expects they will rise by US$218 billion this year after increasing by US$419 billion last year and US$462 billion in 2007, as outward foreign direct investment rises and due to losses on foreign assets, repatriation of profits and "hot money" outflows.

Dai was governor of the central bank from 1998 to 2002. The NSSF that Dai now heads is a fund of last resort for China's provincial pensions schemes.


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