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BEIJING (Reuters) - China is willing to help Europe -- its largest export market -- to deal with its debt crisis and get back on a recovery path, but there are limits to what it can actually deliver, Cheng Siwei, a former top Chinese lawmaker, said on Saturday.
"China certainly hopes the debt crisis could be resolved. If the crisis spreads, it could lead to a break-up of the euro zone and affect the global monetary system as the euro is the second-largest reserve currency," Cheng told reporters.
"But don't pin high hopes on China. China cannot be a hero to the rescue," said Cheng, who remains an influential adviser to the government. "China will lend a helping hand within its capacity but Europe must rely on itself."
Although China has a war chest of $3.2 trillion in foreign exchange reserves, the world's largest, the amount of free cash it could invest in Europe could be limited, Cheng said.
For example, China cannot easily dump its holdings of U.S. Treasuries of around $1.14 trillion, because such a step could send U.S. bonds prices tumbling, he said.
"If we sell U.S. bonds, the U.S. economy could be in trouble," he said.
Cheng, previously a vice chairman of parliament with a rank equivalent to a vice premier, rattled financial markets in 2006 when he said China should trim its holdings of U.S. debt.
Analysts believe at least 70 percent of China's foreign currency reserves have been channeled into dollar-denominated assets, including Treasuries, and a quarter into euro assets.
Buying European bonds would be one of the available options for China to help Europe, Cheng said, adding that China could boost trade with the region and spur direct investment.
China may have bought some bonds issued by the heavily indebted European countries -- Portugal, Ireland, Greece and Spain -- but it's too risky to continue such buying, said Cheng.
Common euro zone bonds still being discussed by European leaders could be attractive for China as long as they are backed by European powers such as Germany and France, he said.
Europe should recognize China's market economy status as a "friendly gesture," he said.
Chinese leaders have pledged their support for Europe, although Premier Wen Jiabao has pushed for the European Union to recognize it as a market economy.
Turning to China's economy, Cheng said the government should keep policy stance tight to help bring inflation under control while allowing "selected easing" to support growth.
The yuan may have reached a "reasonable level" after gaining about 30 percent against the dollar since the landmark revaluation in July 2005, Cheng said, echoing recent remarks by Chinese Commerce Minister Chen Deming at a G20 Summit in France.
He hit back at foreign calls for faster appreciation of the Chinese currency.
"The yuan has already gained 30 percent. Where is an end? You cannot blindly demand the yuan to rise," he said.
The U.S. Senate recently passed a bill that aims to pressure Beijing to raise the value of the yuan more quickly.
Group of 20 leaders on Friday agreed to accelerate a move toward market-driven exchange rates and mentioned China for the first time in that context.
Cheng said China should let the yuan be more flexible and speed up the process of yuan internationalization but refrain from committing itself to a specific timeframe for freeing up the currency.
To match China's rise as a world economic power, Beijing wants to turn the yuan into a convertible currency, and one day have it join the dollar and the euro as a reserve currency.
Some analysts suggest the yuan could become convertible on the capital account by 2015, but Cheng sounded a wary note.
"We cannot announce a timetable (on yuan convertibility). We need to find an appropriate time to achieve it and also consider our ability to manage foreign exchange risks," he said
"More importantly, if we announce a timetable, it could provide an opportunity for speculators," he said.
Reporting by Kevin Yao; Editing by Susan Fenton