China hopes U.S. keeps deficit to appropriate size

• On 1:49 pm EST, Sunday November 8, 2009

SHARM EL-SHEIKH, Egypt (Reuters) - China hopes that the United States will keep its deficit to an appropriate size to ensure basic stability in the U.S. dollar exchange rate, Chinese Premier Wen Jiabao said on Sunday.

"We have seen some signs of recovery in the U.S. economy ... I hope that as the largest economy in the world and an issuing country of a major reserve currency, the United States will effectively discharge its responsibilities," Wen told a news conference in Egypt.

"Most importantly, we hope the United States will keep an appropriate size to its deficit so that there will be basic stability in the exchange rate, and that is conducive to stability and the recovery of the global economy," he added.

The premier had expressed concern in March that massive U.S. deficit spending and near-zero interest rates would erode the value of China's huge U.S. bond holdings.

China is the biggest holder of U.S. government debt and has invested an estimated 70 percent of its more than $2 trillion stockpile of foreign exchange reserves, the world's largest, in dollar assets.

"I follow very closely Chinese holdings of U.S. assets because that constitutes a very important part of our national wealth. Our consistent principle when it comes to foreign exchange reserves is to ensure the safety, liquidity and good value of the reserves," Wen said.

(Reporting by Ben Blanchard; Editing by Cynthia Johnston)

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