China will not sell large quantities of U.S. Treasury bills despite its recent decision to sever the decade-old link between its currency, the yuan, and the dollar, a senior central bank official said here on Friday.
"If we sell large quantities of U.S. treasuries, it would cause the price to plunge," said Ma Delun, deputy governor of the People's Bank of China, speaking at a World Economic Forum conference. "We're not going to do that."
Ma's words to a hotel ballroom filled with international business executives seemed intended to reassure investors and his counterparts in the United States that China's de-linking the yuan from the dollar in favor of a wider basket of currencies -- including the Euro and the Japanese yen -- can be managed without a wholesale reordering of the country's vast foreign exchange holdings.
China now holds more than $700 billion in foreign exchange reserves -- the second-largest reserves after Japan -- with roughly one-third parked in U.S. Treasuries and another one-third in other dollar-denominated assets such as corporate bonds, according to state economists.
China has amassed this huge stock of dollars through years of buying foreign currency to maintain its fixed exchange rate. Following the central bank's decision in July to cut the yuan's peg to the dollar, some analysts speculated that China's appetite for dollars could diminish, prompting Beijing to sell greenbacks and slow its purchases of treasuries. Some suggested that this could force the U.S. Federal Reserve to raise interest rates to support the dollar, and perhaps even choke the real estate market, sending prices plummeting.
Ma reiterated China's assertions that it has no plans to raise the value of the yuan against the dollar, following a 2.1 percent increase in late July. However, he promised that China is committed to eventually allowing market forces to determine the yuan's value, even as the central bank plays a guiding role.
Special correspondent Eva Woo contributed to this report.