China voices faith in Europe, vows to buy debt
China voiced support for European government bonds on Friday as crucial investment choices for the country's massive foreign exchange reserves in the "past, present and future".
January 07, 2011 / 16:53 IST
China voiced support for European government bonds on Friday as crucial investment choices for the country's massive foreign exchange reserves in the "past, present and future".
State Administration of Foreign Exchange (SAFE) head Yi Gang also expressed confidence in the struggling euro, saying the currency played an important role in global markets.China invests an undisclosed portion of its record USD 2.65 trillion in reserves, the world's largest, in the euro. In part to protect this investment, it has repeatedly expressed faith that Europe can survive its nagging debt problems."The euro and European financial markets are important parts of the global financial system. They are one of the most important investment territories for China's foreign exchange reserves in the past, present and future," Yi said.He said China's European debt purchases provided reasonable returns and helped stabilise financial markets.Yi's comments were published on the central bank's website on Friday as part of a summary of his remarks in Madrid, which he visited earlier this week alongside Vice-Premier Li Keqiang.Investor concerns that fiscal troubles in peripheral euro zone nations could spread to bigger countries including Portugal, Spain and Italy have shaken demand for the euro.That, alongside market positioning before US payrolls, dragged the euro to a four-month low on the dollar on Friday.So far, China has publicly promised to buy government debt from Greece and Spain, but has abstained from providing specific values for its investment.Spanish daily El Pais said on Thursday that China was ready to buy about 6 billion euros (USD 7.79 billion) of Spanish debt, citing government sources. Beijing and Madrid did not confirm the report.Asked about the size and nature of China's European bond investment on Friday, SAFE -- an arm of the People's Bank of China that manages China's reserves -- declined to comment.Many analysts say China is simply looking after its own interests by supporting Europe, which also happens to be its biggest trading partner.Jinny Yan, an economist with Standard Chartered in Shanghai, estimated that China had invested between 26% and 28% of its reserves in the euro.Analysts estimate that about two-thirds of China's reserves are parked in dollar assets, although the currency composition is a state secret."As China holds a large amount of euro assets, it wants to protect the value of those assets," she said.Chinese officials have for years worried about the country's vast US Treasury holdings and its attendant dependence on the dollar. The euro, for now, is seen as the most viable alternative to the dollar as a reserve currency."The last thing China wants to see is the collapse of the euro," said Minsheng Securities analyst Zhang Lei in Beijing. "In all perspectives, from the diversification of China's foreign exchange reserves to the needs of geopolitical balance, China will continue to support the euro by buying euro bonds." Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
