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Last Updated: Tuesday, 4 April 2006, 11:53 GMT 12:53 UK
China 'may cut US debt holdings'
Chinese electronics factory worker
US-Chinese trade relations are coming under increasing strain
China may reduce the amount of US bonds it holds as part of its foreign exchange reserves, an influential official has reportedly said.

The remarks, made by Parliamentary vice-chairman Cheng Siwei, triggered a fall in the US dollar against leading currencies in European trading.

China is a major funder of US debt, holding about $260bn (149bn) in US Treasury bonds - second only to Japan.

Any reduction in China's dollar assets could hit the US economy.

Should China cut its US dollar holdings, this could drive up long-term yields on US bonds, which could in turn put pressure on interest rates.

Commercial strain

China's Central Bank said that Mr Cheng was speaking in a private capacity and his remarks did not represent government policy.

China can increase buying of US products and gradually reduce its holdings of US bonds
Cheng Siwei, vice-premier of the Chinese national parliament

However, with Chinese president Hu Jintao due to visit Washington later this month, the comments are sensitive and could put further pressure on the two countries' already strained trading relationship.

US officials are lobbying Beijing to let the yuan trade more freely against other currencies, arguing that its value has been artificially depressed.

This imbalance, Washington believes, allows China to export goods more cheaply and has contributed to its $202bn trade deficit with China.

Hong Kong newspaper Wen Wei Po reported that Mr Cheng - who outranks cabinet ministers but does not decide government policy - had called for a change in the make-up of its foreign reserves holdings.

"China can stop buying dollar-denominated bonds, increase buying of US products and gradually reduce its holdings of US bonds," he said.

Spreading its risk

Beijing has been spreading its risk by accumulating more non-US dollar assets in recent times.

However, economists believe that China will not take steps that will unduly weaken the US dollar and needs to continue accumulating dollar assets to prevent the yuan rising too far in value.

In European trading, the US dollar fell against the euro, the British pound and the Japanese yen.

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