UPDATE 1-China's hands tied over U.S. govt bond investments

(Adds quotes by Cheng and separate finance ministry comments)

BEIJING, June 13 (Reuters) - An influential politician expressed regret on Friday that China has more than a quarter of its huge stockpile of foreign exchange reserves invested in U.S. government bonds.

China held $492 billion worth of U.S. government bonds at the end of March, when its reserves totalled $1.68 trillion, according to Cheng Siwei, a former vice-chairman of the National People's Congress, the largely ceremonial parliament.

"We have no other choice but to buy (U.S.) bonds because we have no better options," Cheng told a conference on mergers and acquisitions.

As well as owning U.S. Treasuries, China has substantial holdings of other U.S. fixed-income assets including agency bonds and mortgage-backed securities, bankers and analysts say. Cheng did not give details of these.

But he said China would be better off if it knew how to manage its foreign exchange reserves more smartly, for instance by investing more in corporate M&A.

"If we have people who know how to invest the money better, there will be no need to buy U.S. bonds," Cheng, who is now chairman of the China National Democratic Construction Association, told reporters.

Cheng has moved markets in the past with outspoken comments on the desirability of diversifying the currency composition of China's reserves, which bankers say are held predominantly in dollars. But he declined to comment on that issue on Friday.

Speaking on the sidelines of another forum, Yuan Haiyao, a Ministry of Finance director, said the dollar's decline in the wake of the subprime crisis had made it harder for China to maintain the value of its foreign exchange reserves.

If China tried to buy other currencies such as the euro, yen and Swiss franc to offset the drop in value of its dollar assets, those currencies would strengthen immediately, making it difficult to buy in large amounts, Yuan told Reuters.

China's reserves are managed by the State Administration of Foreign Exchange (SAFE), an arm of the central bank.

Last September, the government transferred $200 billion from SAFE to a newly created sovereign wealth fund, China Investment Corp (CIC), which was mandated to make riskier investments in search of higher returns.

For a story on the political difficulties CIC is encountering as it goes about its task, please double-click on [ID:nPEK186753] (Reporting by Eadie Chen and Langi Chiang; Editing by Alan Wheatley and Ken Wills)