Sending a clear message to the US not to act against its "core interests", China, sitting on a mountain of US debt said today it would consider to invest more forex reserves in gold, "cautiously" based on market conditions than American bonds.
In a press meet today, Yi Gang, who heads the State Administration of Foreign Exchange and is also the Vice Governor of the People's Bank of China said, China's investment in US treasury bonds depend on market behaviour and should not be politicised.
But his statement that Beijing will look into investing more forex reserves in gold "cautiously" on market conditions sparked off speculation that China may ease more US bonds to buy gold.
China sold $34 billion worth of US government bonds in December, triggering fears that Beijing is using its financial muscle to convey a strong message to the US that it has lost confidence in view of the growing US deficit.
After the sale, by far the highest in a decade, China lost the position of the largest overseas holder of US treasury bonds to Japan which has $768.8 billion. China ended 2009 with $755.4 billion worth of US debt.
The sale took place days after Chinese Prime Minister Wen Jiabao said China is "concerned about the safety" of its assets.
On Sunday, Chinese Foreign Minister Yang Jiechi said that relations with the United States had been "seriously disrupted" following Washington's move to sell $6.3 billion arms to Taiwan, an island that Beijing considers part of its sovereign territory.
China also raised objections over US President Barrack Obama's recent meeting with Dalai Lama, "The responsibility (of improving ties with the US) does not lie with China," Yang said adding that United States "must respect China's core interests" on Taiwan and Tibet.
"I believe the United States understands very well China's core interests and major concerns," he said.
The regulator said that China had achieved "relatively good" yields from its management over foreign exchange reserves in the past two years. China's foreign exchange reserves stood at $2.3992 trillion at the end of 2009, an increase of $453.1 billion year-on-year.
He also said China will keep the exchange rate of the renminbi, or the country's currency yuan, basically stable at a "reasonable and balanced level", in an apparent reference to the US demand that Beijing should remove the controls and allow it float in the open market.
Yesterday, Commerce Minister Chen Deming stated that China may raise the yuan's exchange rate gradually.
China has fixed its exchange rate at around 6.83 yuan per dollar since mid-2008 in a view to help its exporters during last year's global financial crisis.
"The movement and degree of stability in the yuan in times of crisis ought to be different from when there is no crisis, (but) the direction of yuan reform will be gradual and controlled,” Chen said.
