U.S. debt still safest place for China reserves: top banker

Tue Aug 16, 2011 4:21am EDT
 

BEIJING (Reuters) - The U.S. Treasury market is still the safest place for China to put part of its massive foreign exchange reserves despite a downgrade of the U.S. debt rating by Standard & Poor's, Guo Shuqing, chairman of China Construction Bank, said in comments published on Tuesday.

Guo, former head of China's State Administration of Foreign Exchange (SAFE), told the latest edition of the Capital Week that China has held most of its reserves in dollar assets because of "historical reasons as well as realistic needs."

"Holding U.S. Treasuries contains certain risks, but at a time when the global economy is volatile and the euro zone is in deep difficulties, U.S. Treasuries, among all the not-so-ideal products, remain as the best product in terms of safety and returns," Guo told the journal.

Guo, who was the chief of China's foreign exchange agency between 2003 and 2005, noted that U.S. Treasury yields have stayed stable or even become lower after the downgrade.

"The market is telling us that the possibility for a U.S. default is small although short-term fluctuations are inevitable," Guo said.

Guo added that China can buy more resources and equity stakes, but he said these diversification moves would be quite limited compared with the size of China's currency reserves, the world's largest that hit $3.2 trillion at the end of June.

The People's Bank of China, the central bank, and SAFE, the agency that is in charge of day-to-day management of the assets, have been publicly mute after Standard and Poor's stripped the United States of its top-tier AAA credit rating.

Guo's view may not necessarily represent those of current decision makers, but most government advisers and analysts believe Beijing will avoid dumping U.S. debt, which could roil global financial markets and send the dollar into a nosedive.

Chinese officials have pledged to diversify the huge reserves away from dollar assets, but the process has been gradual.   Continued...

 
<p>A view of the Federal Reserve Building in Washington, September 16, 2008. REUTERS/Jim YOUNG</p>