The Dollar and China

— China sought Sunday to dampen speculation it will conduct a massive sell-off of U.S. dollar holdings, with a central bank official saying the dollar remains a mainstay of its foreign exchange reserves.

In an interview carried by the government's Xinhua News Agency, an unnamed official with the People's Bank of China said U.S. dollars and government bonds are "an important part of China's foreign reserve investments."

China's $1.3 trillion in foreign exchange reserves are the largest in the world and are believed to be comprised largely of dollar assets, potentially giving Beijing enormous sway over the dollar's value and currency markets worldwide.

A report in the British newspaper The Daily Telegraph this past week that quoted Chinese government economists as saying China would dump its dollar holdings in the event of a trade war with Washington added to jitters in stock markets already unnerved by volatility in U.S. share markets.

Xinhua said the central banker's remarks were intended to counter unspecified reports in Western media that China "is threatening to carry out a sell-off of U.S. dollars." The Xinhua report was prominently posted on the central government's main website, in a further sign Beijing hoped the statement would underscore its commitment to hold U.S. dollar assets and calm investors.

"China is a responsible investor in international financial markets, and our country's foreign exchange reserves are managed with the operational goals of safety, liquidity and profit," Xinhua quoted the central bank official as saying.

"The U.S. dollar occupies an important position in the international monetary system," the official was quoted as saying. "The U.S. financial markets have high volume and great liquidity. U.S. dollar assets, including U.S. government bonds, are an important part of China's foreign reserve investments."

The People's Bank does not disclose the composition of the foreign exchange reserves, which have swelled in recent years as China's exports surged and investors poured money into the country to profit from an economy now in its fourth straight year of double-digit growth.

But the reserves have become a political issue both within China and between Beijing and Washington. As the dollar has fallen in value, the People's Bank has come under pressure to diversify its holdings to maintain the value of the reserves and improve returns.

Washington has pointed to China's growing reserves as proof that the Chinese currency is undervalued, making Chinese exports cheap, putting American manufacturers at a disadvantage and compounding a hefty U.S. trade deficit. Several U.S. senators have renewed calls in recent weeks to punish Beijing if it does not let the currency, the yuan, rise in value.

In the Xinhua report, the Chinese central banker defended U.S.-China economic and trade relations as underpinning the "stable development" of the global economy.

"We attach great importance to actively promoting the harmonious development of China-U.S. economic and trade exchanges," the official said.