Reports in the US and recent remarks by President George W. Bush about the consequences of such a potential move have added to uneasiness on global markets, already battered by the US mortgage crisis.

But an unnamed Chinese central bank official all but denied yesterday that Beijing would contemplate such a move, saying China was 'a responsible investor in international financial markets'.

He also gave a vote of confidence to the dollar, saying US dollar assets remain a key part of China's foreign exchange reserves.

The assurances by Beijing followed a report last week by British newspaper the Daily Telegraph which said that Beijing could dump its vast dollar holdings in a tit-for-tat move if the US imposed trade sanctions on China.

The report quoted two senior economists at Chinese government think-tanks as saying that Beijing's foreign reserves should be used as a political weapon or 'bargaining chip' in trade talks with the US.

China is the second-largest foreign holder of US government debt, and its US$1.3 trillion (S$2 trillion) foreign exchange reserves are believed to be largely made up of dollar assets. This potentially gives Beijing great influence over the dollar's value and international currency markets.

The Telegraph report prompted Mr Bush to say China would be 'foolhardy' to dump US dollar assets. The top Republican on the Senate Finance Committee also wrote to the Chinese ambassador in Washington seeking clarification on the report.

In an interview with Fox TV last week, when asked whether such an option would hurt China more than the US, Mr Bush said, 'Absolutely. I think so', adding that the two countries could resolve their differences in a 'cordial way'.

The Chinese central bank sought to end further speculation on the issue with its unambiguous declaration yesterday.

'US dollar assets, including American government bonds, are an important component of China's foreign exchange reserves,' the central bank official told Xinhua in response to the Telegraph report.

'The close economic and trade relations between China and the United States play an important role in the stable development of the two countries' economies, and the world economy as well.'

His comments come hot on the heels of frenzied injections of billions by central banks in Japan, Europe and the US into markets to soothe investors' worries that losses sparked by investments in sub-prime US mortgages - those given to homebuyers with poor credit ratings - could snowball into a global credit squeeze.

Meanwhile, Treasury Secretary Henry Paulson - Washington's point man at Sino-US economic talks - dismissed the dollar speculation as 'absurd'. Analysts point out that China cannot be unaware that selling off dollars would lower the value of the dollar - which would hurt its own investments.

But Beijing and Washington have been locked in several bitter trade and currency disputes in recent years, and signs are that political pressure is mounting.

Charging that the yuan is undervalued, several US senators have made renewed calls in recent weeks to punish Beijing if it does not let the yuan rise in value.

Reflecting this, leading US presidential contender Hillary Clinton has called for restrictive legislation to prevent US being 'held hostage to economic decisions being made in Beijing, Shanghai or Tokyo'. She said foreign control over 44 per cent of the US national debt had left America acutely vulnerable.

China's huge foreign exchange reserves has sparked controversy in other ways. Following Beijing's acquisition of 10 per cent of US investment trust fund Blackstone in May, the China Development Bank announced last month that it was taking a stake in Barclays Bank - along with Singapore's Temasek Holdings - to help the British firm raise enough money to take over Dutch bank ABN Amro.

These moves by sovereign wealth funds, which invest currency reserves in foreign assets, prompted warnings from some Western leaders. The US, France and Germany are now drawing up rules for such bids by foreign state-controlled investment funds, a development that Beijing does not relish and which might have contributed to the talk about dumping US dollar assets in retaliation.

simcy@sph.com.sg