China should gradually reduce its holdings of U.S. debt and can stop buying dollar-denominated bonds, a Hong Kong newspaper on Tuesday quoted Cheng Siwei, a vice chief of China's parliament, as saying.With China a leading financier of the U.S. current account deficit, Cheng's comments sent the dollar lower against the euro and yen and also pushed down prices of U.S. government bonds.
The Beijing-funded Wen Wei Po daily carried Cheng's comments, made in Hong Kong on Monday, but it was not immediately clear whether they reflected those of top decision makers who determine the content of China's reserves, the world's largest.
Cheng is one of more than 10 vice chiefs of the parliament and usually speaks on economic policy. His rank is equivalent to vice premier, outranking cabinet ministers, but he does not have specific responsibility for economic policy.
Some of the Chinese holdings of US debt are mortgage backed securities. Even if China does not reduce its US debt holdings and merely decides to stop buying US debt that would significantly raise borrowing costs for various types of US debt including mortgages. Remember 8 or 9% mortgage interest rates?
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