The China Investment Corporation Ltd. (CIC), launched in September with 200 billion dollars capital, wants to boost investment returns on China's massive foreign reserves and manage reform of domestic financial institutions.

"China should not use the earnings of its sovereign wealth fund to delay the continued increase in the flexibility of China's currency," US Treasury's deputy assistant secretary for Asia Robert Dohner said.

"It is important that China move more rapidly to increase renminbi (yuan) flexibility," he said at a hearing of the US-China Economic and Security Review Commission, a Congressional advisory panel which considered implications of sovereign wealth fund investments for national security.

The yuan currency is seen by US lawmakers and other groups as undervalued against the dollar, making US-bound Chinese exports cheaper and fueling a trade deficit, which hit a record of more than 238 billion dollars last year.

Several bills have been proposed in the US Congress threatening China with sanctions if Beijing -- which has a whopping 1.5 trillion dollars in reserves -- did not allow greater currency flexibility.

Dohner called on China's leaders to keep their word that CIC would operate on an entirely commercial basis and in an open and transparent manner.

"We will continue to work with CIC and other SWFs and watch their activities vigilantly," he said.

Sovereign wealth funds, including from oil-rich Middle East nations, have come under tight scrutiny in recent months as they use excess foreign exchange reserves to buy stakes in financial institutions, especially in credit-tight United States.

In the United States, CIC bought a three billion stake in private equity firm Blackstone Group LP and announced plans to invest five billion dollars in Morgan Stanley, for an ownership stake of no more than 9.9 percent of the investment bank's total outstanding shares.

Several US lawmakers expressed concern at the hearing over China's financial maneuvers, saying it could pose a threat to American economic security.

But Linda Thomsen, director of the US Securities and Exchange Commission's (SEC's) enforcement division, said the CIC's appeared to be taking a "measured approach" to its investments and was acting as a "passive investor."

"Can Carlyle or Bear Stearns rest easy that they will have an equal opportunity to get access to China's markets?," asked Democratic Senator Sherrod Brown, citing leading US business groups.

"And do we really think that a nearly 10 percent is a passive investment in the practical sense of the word," he asked.

Marcy Kaptur, a Democratic House of Representatives lawmaker said, more often than not, deals such as those from CIC "are presented as purely financial when they are, in fact, political and strategic."

She called for disclosure and increased transparency of all sovereign wealth fund bids and suggested beefing up regulation.

Jim Webb, another Democratic senator, said "passive" investments could still provide foreign governments and state-owned corporations with "control" over sensitive national security information.

But the White House on Thursday urged lawmakers to be "very, very careful" at considering legislation that could curb investments and send wrong signals to foreign investors.

Spokesman Tony Fratto said the White House had "no particular" concern about CIC but emphasized that any such institutions must be transparent and seek economic, rather than political gains from investments.

With power derived from being government entities, sovereign wealth funds may have access to government officials and information not available to other investors and engage in insider trading or other market abuses, SEC's Thomsen said.

"The magnitude of any such conduct could be quite large given the assets these funds have at their disposal," she said.

The United States has asked China to participate in the drafting of voluntary international "best practices" for sovereign wealth funds that was being coordinated by the International Monetary Fund.

Such a voluntary code could be drawn up as early as this fall.

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