China's foreign-exchange agency sought to ease concerns about how it uses its huge currency reserves, saying it operates on market principles and would never wield its holdings of U.S. government debt as a threat.
The statement Wednesday by the State Administration of Foreign Exchange was the latest in a series of moves by the secretive agency aimed at addressing market concerns about its influence. Presented in question-and-answer form, the statement, posted on the agency's website, rebutted what it portrayed as misconceptions about its management of China's $2.4 trillion U.S. in foreign-exchange reserves, the world's largest.
The statement rejected the notion posited by some analysts and American politicians that China's large holdings of U.S. debt constitute a "threat" to the U.S. The agency said the market for U.S. sovereign debt remains an important one for China's reserves, due to its security, liquidity, large capacity and low transactions costs.
The sovereign debt of some other countries may not be issued in sufficient quantities to meet China's needs, the agency said, without naming countries.
The foreign-exchange administration's investment actions are frequently the subject of speculation that sometimes affect global markets. While it long refused to comment on such issues, the agency has become somewhat more forthcoming over the last year since its U.S.-educated chief Yi Gang took the helm.
In May, the agency issued a rare denial of a market-rattling media report that suggested China was considering reducing its holdings of euro-zone debt.
The agency gave no reason for issuing Wednesday's statement, which offered no fresh detail on the composition of China's holdings. It was the third statement in the last week under the label "Q&A on hot topics in foreign-exchange management."
The statement reiterated China's rationale for diversifying its reserves, long dominated by dollar assets, saying it can help control risk and maintain the stability of the "overall value" of reserves.
China, the biggest holder of U.S. government debt, has ramped up purchases of Japanese government bonds this year, apparently part of its diversification effort. China bought some $6.17 billion U.S. in Japanese government bonds in the first four months of the year, more than double the full-year record it set in 2005.
The statement said that China's investment in U.S. debt "is a market investment action" and that "whether to increase or reduce holdings of U.S. sovereign debt is entirely a normal investment operation."
In response to what it presented as a question about whether China would use its reserves as a "nuclear weapon," Wednesday's statement said such concerns are "totally unnecessary." It said the foreign-exchange agency is a financial investor that abides by all laws in the countries where it invests and doesn't seek controlling authority over its investment.
The statement also reiterated that gold cannot become a "major channel" for the investment of China's reserves, because its supply is limited and large purchases of gold would impact its price. Gold provides protection against inflation, but so do other assets, and gold's return over a 30-year period "has not been very good," it said.
The agency repeated previous urging by Chinese officials that the U.S. and other major issuers of reserve currencies reduce their reliance on fiscal-debt expansion and preserve the value of their currencies to safeguard investor interests. It said the dollar might appreciate against other currencies, as its value is determined by trends in other major economies, and noted the dollar appreciated 20% against the euro from the end of 2009 to May this year.
