China should cut holdings of dollar assets to limit losses on its
foreign currency reserves, while letting the yuan move more freely, a
former adviser to the People's Bank of China said in comments
published on journal.

"China should now reduce its holdings of dollar assets as far as
possible, rather than increasing holdings," Yu Yongding, an academic
member of the central bank's monetary policy committee until 2006,
wrote in an article in the latest edition of Caijing magazine.

"This means the central bank, to avoid further rises in foreign
exchange reserves, must reduce its intervention in the foreign
exchange market," he said.

"Reducing intervention means the exchange rate will appreciate in line
with market supply and demand," he added.

China's foreign exchange reserves, the world's largest, hit a record
$2.65 trillion at the end of September, a reflection of heavy-handed
intervention to hold down the yuan's value

Yu, a professor at the Chinese Academy of Social Sciences, a top
government think-tank, has long championed a more market-driven
exchange rate regime.

Yu has also long held a bearish outlook on the U.S. dollar, which he
reiterated. Monetary easing to stimulate the flagging U.S. economy may
in reality fuel U.S. public debt and inflation, which in turn pointed
to persistent dollar weakness, he said.

The real purpose of the policy easing was to accelerate the dollar's
depreciation and boost U.S. export competitiveness, he said.

"Facing the dollar's depreciation and worsening inflation, holders of
U.S. government debt, particularly foreign holders, will dump U.S.
debt to avoid further losses," he said

China will curb its reliance on exports sooner than the U.S. can cut
its budget and external deficits, removing a support from the dollar
that will unsettle currency markets, Morgan Stanley's Stephen Roach
said.

"In the next three or five years China will move aggressively to
increase its private consumption and reduce its surplus saving,"
Roach, who is non-executive chairman of Morgan Stanley Asia Ltd., said
in an interview in Oslo yesterday. "The U.S. talks the talk, but there
is actually no shred of evidence whatsoever that America is going to
reduce its budget deficit over that same period."


U.S, THE WORLD'S LARGEST BUGGET DEFICIT $1.5 trillion

China may post a trade deficit as early as this quarter as imports
outpace sales abroad, the government said last month. The country's
reliance on trade to fuel economic growth close to 10 percent is now
fading as its consumers grow wealthier, removing a key incentive for
China to support the dollar. At the same time, the world's largest
economy estimates its budget deficit will swell to a record $1.5
trillion this year, as President Barack Obama channels stimulus to
revive growth.