China should shun U.S. treasuries -economist

HONG KONG, Nov 26 - China should no longer buy U.S. Treasury securities because the recent gains in the dollar may be short-lived, eroding the future value of such holdings, an economist with a government think-tank said on Wednesday.

The United States is expected to look to China, which has about $2 trillion in reserves, the world's largest stockpile, as well as Japan and oil exporters to help finance the mounting costs of its bailout of the financial sector.

"Some may argue that it is right to buy more U.S. Treasuries because the dollar is strengthening," Yu Yongding told Reuters in an interview. "But we must note that the dollar is strengthening purely because of the current crisis, and it is not really gaining value."

He added: "Owing to political reasons, China may not have the luxury to sell U.S. Treasuries, but China should definitely buy no more -- nobody knows how bad the U.S. situation could get and China should not take too many risks."

The suggestions by Yu, a researcher with the Chinese Academy of Social Sciences and a former central bank adviser, are at odds with the official government line.

Vice central bank governor Yi Gang said earlier this month that Beijing would not resort to "panic selling" but would maintain a "prudent and responsible" stance in managing its foreign exchange reserves.

Investment bank China International Capital Corp went so far recently as to suggest that China should buy more Treasuries now to help fund the bailout of U.S. banks and should do so before other countries to benefit from the rise in bond prices.

Still, Yu's comments give an indication of the intensity of debate in policy circles over whether taking on more U.S. debt is really in the country's best interests.

Yu did not address the massive reverberations any signal by China that it would stop buying U.S. government debt would have for the global economy -- and ultimately, China.

He also did not lay out a detailed proposal on what the central bank should do instead with its continuous influx of new foreign exchange reserves, which are set to increase by about $500 billion in 2008 and about two-thirds of which analysts say are invested in dollar-denominated assets.

However, the People's Bank of China should consider using some of the reserves to buy commodities and strategic resources now, since prices are low, Yu said.

"Commodity prices have fallen sharply, and for those products necessary for long-term development, China should consider buying some as part of the reserves," he said.