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Cablegate: Reassurance On Freign Exchange Reserves

VZCZCXRO9432
OO RUEHCN RUEHGH RUEHVC
DE RUEHBJ #5317/01 2260737
ZNR UUUUU ZZH
O 140737Z AUG 07
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC IMMEDIATE 0749
RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 02 BEIJING 005317

SIPDIS

SIPDIS
SENSITIVE

STATE FOR EAP/CM AND EB/OMA
TREASURY FOR OASIA/DOHNER
USDOC FOR 4420
STATE PLEASE PASS USTR FOR STRATFORD

E.O. 12958: N/A
TAGS: ECON EFI PREL EINV CH
SUBJECT: REASSURANCE ON FREIGN EXCHANGE RESERVES

SUMMARY
-------

. (SBU) Beijing-based economist He Fan told EconMinCouns and
FinMinCouns that an August 8 article published in the London Daily
Telegraph quoted him out of context when it suggested that he
believed China had the power to set off a U.S. dollar (USD) collapse
in response to U.S. actions on trade and currency issues. Mr. He
was actually never interviewed by the Telegraph, and the paper
appears to have selectively drawn words from an op-ed he published
in Chinese media the previous day but had written months earlier.
Meanwhile, on August 12, the state-controlled Xinhua news agency
prominently featured comments of an unidentified central bank
official emphasizing the importance of USD assets in China's foreign
exchange reserves. END SUMMARY

UK PAPER HIGHLIGHTS CHINESE "THREATS" AGAINST USD...
--------------------------------------------- -------

2. (SBU) On August 8, the London Daily Telegraph reported that the
"the Chinese Government has begun a concerted campaign of economic
threats against the United States, hinting that it may liquidate its
vast holding of U.S. Treasury bonds if Washington imposes trade
sanctions to force a RMB revaluation." Two Chinese economists were
quoted in the article as suggesting that Beijing would use its
foreign currency reserves as a "political weapon to counter pressure
from the U.S. Congress." The piece in the Telegraph was widely
reflected in other media reporting and commentary throughout Europe,
Asia, and the United States. More than 550,000 online readers
linked to the article, according to a count published on August 9 by
the newspaper. (The article can be found online at: http:// www.
telegraph.co.uk/money/main.
jhtml?xml=/money/2007/08/07/bcnchina107a.xml)

...DRAWING SELECTIVELY FROM OP-ED IN CHINA DAILY
--------------------------------------------- ---

3. (SBU) The Daily Telegraph article took out of context the views
of a Beijing-based economist, portraying him as suggesting that
China had the power to set off a USD collapse if it chose to do so.
The economist, He Fan, who is the Assistant Director of Chinese
Academy of Social Sciences Institute of World Economics and
Politics, had on August 7 published an op-ed in the state-controlled
China Daily. Mr. He's piece does not advocate liquidation of
China's USD reserves. Rather, Mr. He argues for a slow and gradual
appreciation of the RMB in order to give China greater flexibility
in carrying out monetary policy and encourage industrial
restructuring. Mr. He further suggests that the U.S. has more to
gain if China maintains the RMB at a stable level, since China holds
a considerable portion of its reserves in the form of U.S. Treasury
bonds and that a more flexible exchange rate could require China to
sell some of its holdings, causing the U.S. dollar to depreciate
further. (Comment: this is not necessarily true, as less foreign
exchange intervention might only lead to fewer purchases, but not
net sales of U.S. fixed income assets. End Comment) He also asserts
that exchange rate reform is only one part of a package of policy
reforms needed to upgrade China's industry structure. Mr. He
concludes by warning against politicizing the exchange rate issue,
suggesting this could slow reform. (Mr. He's op-ed is available at:
http:// www .chinadaily. com.cn/cndy/
2007-08/07/content_5448889.htm)

ECONOMIST SAYS HE WAS QUOTED OUT OF CONTEXT
-------------------------------------------

4. (SBU) Speaking to Emboffs on August 13, Mr. He stated that even
though the op-ed ran recently, he actually drafted it several months
ago. He said he was never interviewed by the Daily Telegraph and
could not understand why a British paper had characterized his views
as threatening to the United States. Mr. He insisted that not a
single Chinese Government official has ever threatened to use
foreign exchange reserves as a political weapon, and that he had
never proposed this. Moreover, while other countries are reducing
the share of their official reserves in USD holdings, China
continues to maintain the majority of its foreign exchange reserves
in USD assets. Mr. He said that to his knowledge, there are no
Chinese academics who believe China should leverage its foreign
exchange reserves to counter contemplated U.S. Congressional action
on trade and currency. In Mr. He's view, the U.S. should "maintain
a lower profile" on controversial issues, and particularly on
China's exchange policy, since public pressure is unhelpful to
Chinese officials who at the same time have to respond to growing
domestic anxiety about economic challenges.

XINHUA SETS THE RECORD STRAIGHT

BEIJING 00005317 002 OF 002


-------------------------------

5. (SBU) On August 13, Xinhua News reported statements from a
People's Bank of China (PBOC) official downplaying rumors of
Beijing's threat to sell off its USD reserves and reiterating
China's support for close economic and trade relations with the U.S.
The unnamed official stated that "the U.S. financial market is huge
and has high liquidity, and dollar assets, including U.S. government
bonds, are an important component of China's foreign exchange
reserves investment." Reciting previously stated policy, the
official said Beijing's priorities in managing its $1.33 trillion in
foreign currency reserves include "safety, liquidity, and investment
returns." The PBOC official further stated, "In deciding the
portfolio of the currency assets structure, [we] have consistently
stuck to a long-term, strategic policy, taking into consideration
multiple factors such as China's foreign economic development,
evolution of the international monetary system, as well as changes
in the international capital and foreign exchange markets." (The
Xinhua report can be found at: http://www. chinadaily.com.cn/china/
2007-08/13/content_6023038.htm)

COMMENT
-------

6. (SBU) Comment: The original op-ed piece, Xinhua's rapid
clarification, and Mr. He's remarks echo previous assurances by
State Administration of Foreign Exchange (SAFE), PBOC, and MOF
officials that any changes in the composition of China's reserves
would be done in a way that safeguards orderly financial markets,
and particularly U.S. fixed income markets. In early August, PBOC
Deputy Governor Hu Xiao Lian told visiting Treasury Under Secretary
McCormick that comments by Chinese economist Xiao Bin, who in
addition to Mr. He was a quoted in the Telegraph article, do not
reflect government policies. Lou Ji Wei, Deputy Secretary of the
State Council and Head of the State Investment Corporation, also
assured visiting Treasury Deputy Secretary Kimmitt in June, that
China will maintain a responsible approach to foreign reserves
management. End Comment.

RANDT

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