China Urges U.S., Europe to Protect Value of Debt in Reserves

By Belinda Cao

Feb. 18 (Bloomberg) -- China, whose $1.95 trillion in currency reserves are the world’s largest, called on the U.S. and Europe to protect the value of its overseas investments and said it plans to spend more foreign exchange on imports and acquisitions.

“We hope countries whose currencies are the main holdings in our international reserves will take effective measures to cope with the financial crisis,” Fang Shangpu, deputy director at the State Administration for Foreign Exchange, told a press conference in Beijing today. “They should work to maintain economic and financial stability, and protect the interests and confidence of investors.”

China increased its purchases of U.S. Treasuries last year by 46 percent to $696.2 billion, data released by the U.S. Treasury Department yesterday showed. Premier Wen Jiabao said on Feb. 2 his government’s Treasury strategy would be aimed at maintaining the “value” of its foreign reserves.

Benchmark 10-year Treasury yields climbed 44 basis points, or 0.44 percentage point, to 2.65 percent so far this year on speculation the government will step up borrowing to finance President Barack Obama’s $787 billion stimulus package.

U.S. government bonds returned 14 percent last year including price gains and reinvested interest, the most since rallying 18.5 percent in 1995, according to indexes compiled by Merrill Lynch & Co. Concern that the flood of bonds would overwhelm demand caused Treasuries to lose 3.1 percent in January, the steepest monthly drop in almost five years.

The nation’s decision of “whether to buy and how much to buy” of U.S. Treasuries will depend on “China’s own needs and follow the principle of value preservation and safety,” Fang said.

SAFE will also facilitate foreign-exchange purchases for companies seeking expansion overseas and use more reserves for imports, it said today.

The nation may set up an oil fund using part of the reserves to help companies buy fields abroad, according to a statement this week by the China National Petroleum Corp., the country’s biggest oil producer.

To contact the reporter on this story: Belinda Cao in Beijing at lcao4@bloomberg.net