BEIJING (Bloomberg) -- The U.S. is urging China's central bank to buy more mortgage-backed securities after a surge in defaults by risky borrowers in the world's largest economy eroded demand for such instruments.

U.S. Department of Housing and Urban Development Secretary Alphonso Jackson is in Beijing to persuade the Chinese central bank to buy more securities from Ginnie Mae, a mortgage association under the Housing Department. Its securities are guaranteed by the U.S. Government National Mortgage Association. “It's not a matter of whether they're going to do more business in mortgage-backed securities, it's who they're going to do business with,” told reporters in Beijing. The U.S. housing regulator is seeking to tap China's $1.33 trillion of foreign-currency reserves, the world's largest, after surging defaults on sub-prime mortgages caused the near-collapse last month of two hedge funds run by Bear Stearns Cos. Almost $12 billion of U.S. mortgage securities have been downgraded by ratings companies since July 11. Ginnie Mae is “in a better position than most” to offer mortgage products since, unlike Fannie Mae and Freddie Mac, it has the full backing of the U.S. government, said Jackson. Mortgage securities offer China's central bank better returns than U.S. Treasury bonds at the same level of credit risk, he said. China held $414 billion in U.S. Treasuries as of April, according to data compiled by Bloomberg. Jackson met with central bank Governor Zhou Xiaochuan and Minister of Construction Wang Guangtao in the nation's capital this week. Central bank spokesman Li Chao couldn't immediately be reached for comment. -------------------------- Commercial banks China has approved the creation of a new agency that will manage about $200 billion of its foreign exchange reserves, as the government seeks to boost returns from its holdings. The nation held $107.5 billion in U.S. mortgage-backed securities as of June 2006, up from $3 billion three years earlier, according to HUD's website. The figures include securities offered by Ginnie Mae, Fannie Mae, and Freddie Mac, without providing a more detailed breakdown of each agency's holdings. “China's bought some mortgage-backed securities from us, but not in great numbers,” Jackson said, without providing a target for future purchases. HUD also plans to approach Chinese commercial banks such as China Construction Bank Corp. and ask them to buy mortgage securities, said Jackson. The housing department wants to sign a memorandum of understanding with construction minister Wang when he visits the U.S. in August, Jackson said without elaborating. The two nations face similar challenges in providing affordable housing to average citizens, he said