* US Treasury bond is partnership between China and US-source
* Debt ratings only one factor in reserve decisions-sources
* No alternatives to dollar-India, Japan, S.Korea sources (Adds details, quotes)
By Hideyuki Sano and Yoo Choonsik
TOKYO/SEOUL, June 3 (Reuters) - Asia's richest central banks would likely shrug off portfolio losses from a U.S. sovereign credit rating downgrade and keep buying U.S. Treasuries to help maintain market stability, officials and other people with direct knowledge of policymaking say.
A U.S. rating cut would weaken the dollar and wreak havoc on investments around the world benchmarked against Treasuries, but the sources said it would not cause China, Japan, India and South Korea to change their reserve policies because there are no alternatives to the liquidity afforded by the dollar.
Those four countries control about half of the world's foreign exchange reserves.
"They (central banks) are not competing against mutual funds or hedge funds. If they make a loss it's okay, as long as they are sticking to the investment policy imposed from the very top, because they are not concerned with short-term gains or losses," said a person familiar with the thinking of Chinese reserve managers, who spoke on condition of anonymity because of the sensitivity of the issue.
"The U.S. Treasury bond is a partnership the Chinese government holds," the source added, stressing that selling down dollar-denominated assets could hurt the political relationship between China and the United States.
China is the single largest U.S. creditor, holding $768 billion of Treasuries in March, up 56 percent in the last year.
Beside China, other Asian central banks have also been replenishing their foreign reserves. In April, reserves in Asia ex-China rose $15.2 billion to $2.46 trillion. [ID:nSP482212]
While some private economists said a U.S. downgrade is highly unlikely, none of the Asian officials who spoke to Reuters dismissed the possibility, though they said it would have a limited impact on their reserve management policy.
"Even if there is a risk of a U.S. downgrade it is not feasible for central banks to move investments quickly as it would have implications for the global markets," a senior Indian central bank official who was not authorised to speak with the media told Reuters.
"Moreover, U.S. markets are still the most liquid and the deepest in the world."
India has $260.63 billion in foreign reserves, the fifth-largest in the world. It has been rapidly adding to its Treasury holdings, owning $38.2 billion in March compared with $11.8 billion a year earlier, U.S. government data show.
Fears of a U.S. downgrade grew after Moody's Investors Services cut Japan's top credit rating in May and Standard & Poor's lowered its outlook on Britain's sovereign rating to negative, giving it a one-in-three chance of rating downgrade.
Worried investors pushed up the 10-year Treasury yield some 40 basis points in the last two weeks and knocked the dollar down to 2009 lows against the euro.
"A rating is one of many yardsticks we look at when we manage reserves. It's nothing more, nothing less," said a senior official at Japan's Ministry of Finance.
"Safety and liquidity are what we care about the most when we manage reserves," the official said.
Japan's foreign reserves were $1.01 trillion as of April, the second-largest stash of currency reserves in the world. Japan owned $687 billion in Treasuries at end-March, up 15 percent from a year ago.
STICKING WITH POLICY
Worries about the rapidly growing U.S. fiscal deficit and debasement of the dollar could keep upward pressure on Treasury yields, making it perhaps more attractive to put off purchases of U.S. debt and reach for higher yields later.
But reserve managers are more concerned with stability rather than returns.
In recent weeks, Chinese leaders and economists have expressed concern about the safety of their U.S. dollar-denominated debt.
But U.S. Treasury Secretary Timothy Geithner, who is in Beijing for meetings with Chinese leaders, said on Tuesday China expects the dollar to remain the prime global reserve currency and also was confident in the U.S. response to the financial crisis. [ID:nL2583776]
Sources who spoke to Reuters underscored the importance of holding dollars over other assets because of its stability.
"Even if the rating is cut, what will the rich countries buy?" said a senior official at a South Korean financial authority.
"Do you think they will hold the weakening dollars in cash? Will they buy gold or Chinese bonds? Never. They can't enter into the volatile commodities markets. You may say it is regrettable, but there are no alternatives."
Korea's foreign reserves, the sixth-largest in the world, had the biggest monthly rise ever in May to $226.77 billion.
While officials downplayed the impact of a U.S. downgrade on reserve policy, some market watchers in the private sector were already anticipating the chain reaction such a move would cause.
"Nowadays, the rating agencies are more careful than before, so they may react ahead of time," said Daniel Truchi, chief executive of SG Private Banking, a branch of Societe Generale, in Singapore.
"If we start downgrading government bonds, then what happens to the corporate bonds and equities? We are in a very dangerous zone."
(For more news on U.S. sovereign credit ratings, click on [US-RATING-GVD-AAA-RTRS-LEN]
(Additional reporting by Saikat Chatterjee in MUMBAI, Kevin Lim in SINGAPORE and Kevin Plumberg in HONG KONG, Writing by Kevin Plumberg; Editing by Kim Coghill)