Sep 14, 2011, 02.39 PM IST
Amid uncertainty about the fate of its over USD 1.16 trillion holdings in downgraded US treasury bills, China has evinced interest in buying Italian bonds to help Rome ease its debt crisis.
A strong indication of China's support came from Chinese Prime Minister Wen Jiabao today, when he said China is willing to help debt-laden Europe by increasing its investment.
"We have been concerned about the difficulties faced by the European economy for a long time and we have repeated our willingness to extend a helping hand and increase our investment," Wen said in his address at the inauguration of the World Economic Forum's annual meeting at the Chinese city of Dalian.
In return, Wen asked the European Union (EU) to acknowledge China's status as a market economy and hoped EU leaders would look at Sino-EU relations from a bold and strategic perspective.
"Based on the WTO rules, China's full market economy status will be recognised by 2016. If EU nations can demonstrate their sincerity several years earlier, it would reflect our friendship," he said.
Wen added that he hopes his scheduled meeting with EU leaders next month will lead to a breakthrough in this regard.
His comments came as Chinese media reported that Beijing is interested in buying Italian debt.
"We support European countries' efforts to handle the debt crisis and believe they will enhance coordination and take collective measures to properly address related issues," Ministry of Foreign Affairs spokeswoman Jiang Yu told reporters yesterday.
"China hopes to expand cooperation with EU countries in the areas of trade, finance and investment to jointly counter challenges," Jiang said, without confirming whether Chinese and Italian officials were involved in talks over the purchase of Italian bonds.
Her remarks came in the wake of a report by the Financial Times of London which said that Italian officials, led by Finance Minister Giulio Tremonti, arrived in Beijing two weeks ago to discuss the possibility of China buying "substantial quantities" of Italian debt.
An Italian Treasury spokesman confirmed the talks.
Accounting for 120% of its GDP, the size of Italy's debt now stands at 1.9 trillion euros (USD 2.59 trillion), which is more than Spain, Greece, Ireland and Portugal combined and accounts for 23% of all euro zone sovereign debt, China's state-run Global Times reported.
It is not known how much Italian debt China plans to buy.
Wu Xiaoling, a former deputy governor of the People's Bank of China, said in a forum that helping Italy would be positive for both China and the world.
Yuan Gangming, an economist with the Chinese Academy of Social Sciences, told the Global Times that the possibility of China purchasing Italian bonds is quite high, given the mutually beneficial outcomes of the move.
"China's excessive investment in US Treasuries has made it vulnerable to US economic turbulence and caused it to lose its basic rights as the largest creditor. Under such conditions, China urgently needs to diversify its foreign reserve investments so as to reduce the proportion and impact of US debts," Yuan said.
China has the biggest foreign exchange reserves in the world at about USD 3.2 trillion, mostly invested in US bonds and assets.
Beijing has repeatedly urged Washington to protect China's investments after Standard & Poor's downgraded its rating of US debt in early August.
During a trip to Budapest in June, Premier Wen Jiabao said that China could offer a hand to Europe to fight the crisis and announced a one billion euro loan to Hungary.
In another sign of China's determination to help ease the euro zone debt crisis, Chinese banks agreed to lend USD 267.8 million to three Greek shippers after Wen promised in October that China would buy Greek bonds to support its shipping industry.
Yuan noted that as a rising economy, it falls within China's obligations to shoulder more responsibility in global political and economic affairs by helping European countries and China has the capability to do so.
However, Tan Yaling, the director of the China Forex Investment Research Institute, had a more cautious view of Italian bonds due to the hidden risks and dim prospects for an improvement in the economic situation in the euro zone.
"Financially speaking, buying Italian debt would be risky," Tan told the daily, attributing his concerns to structural problems in Italy's economy that will result in little momentum for growth in the near future.
Nevertheless, Tan acknowledged that the move may help to diversify China's foreign currency reserve investment, though he pointed out that the sum would not be a large one.
Tian Yun, an expert on macroeconomics at the China Macroeconomics Institute, told the Global Times that although there are chances for gains and losses, the purchase could be used as leverage to solve a slew of disputes.
With Chinese exports enjoying an increasing share of the European market since last year, getting Italy out of the crisis would also benefit China's ties with the EU, Tian noted.
"China and Europe need each other. The favour will be returned," Tian said, asserting that China will buy Italian bonds.
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