June 13 (Bloomberg) -- China's government, which invests up to a third of its $1.68 trillion in currency reserves in Treasuries, is ``not smart'' to invest in U.S. debt and should seek higher returns, a former legislator said.

``I don't think it's a smart move to invest in U.S. bonds,'' said Cheng Siwei, former vice chairman of the National People's Congress, China's legislature, at a Beijing conference. ``We need smart capitalists to invest ourselves,'' instead of lending money to American investors and earning interest, he said.

Cheng's remarks on Nov. 7 that China should improve the structure of its foreign reserves by favoring stronger currencies helped pushed the dollar to record lows against the euro. He said today his comments represented his ``personal opinion, not the government's policy.''

Countries in Asia have amassed a record $4.2 trillion in foreign exchange reserves since the 1997-98 financial crisis, seeking to protect their economies from a similar regional currency slump. China set up China Investment Corp., a $200 billion sovereign wealth fund, in September to seek higher returns on its holdings.

China's government should invest funds ``directly'' abroad, Cheng said today without elaborating. Asked whether he's urging the Chinese government to diversify from Treasuries, Cheng said ``it's an unavoidable choice now'' to buy U.S. bonds.

CIC Investments

Cheng said it's too early to judge whether the investments made by CIC were ``smart'' because of its short operation period. The fund invested more than $100 million in Visa Inc.'s initial public offering this year, the Chinese-language Caijing Magazine reported March 25, citing unidentified people.

CIC spent more than $8 billion last year buying stakes in private-equity firm Blackstone Group and Morgan Stanley. Blackstone's shares price declined 45 percent since its IPO last June. The U.S. dollar has weakened 5.5 percent against the yuan this year, according to a data compiled by Bloomberg.

Cheng is currently Chairman of China Democratic National Construction Association and an honorary professor at Peking University.

To contact the reporter on this story: Belinda Cao in Beijing at lcao4@bloomberg.net

Last Updated: June 13, 2008 01:10 EDT