China to keep investing in euro area debt, pledges central bank

Thu, Feb 16, 2012, 00:00

CHINA WILL continue to buy euro area debt and keep holding euro, central bank governor Zhou Xiaochuan said yesterday, underlining broad support among China’s leaders for Europe in its hour of need.

However, Mr Zhou said the world’s second-biggest economy wants more clarity on how exactly the bloc is working to strengthen its finances before it makes any commitments.

“China will always stick to the principle of holding assets of EU sovereign debt,” People’s Bank of China governor Zhou told students at the University of International Business and Economics in Beijing. “We would participate in resolving the euro debt crisis.”

His comments came as the EU-China summit in Beijing was coming to a close. The remarks are in line with those by premier Wen Jiabao.

At the summit, whose participants included EU president Herman van Rompuy and European Commission president José Manuel Barroso, Mr Wen said China was ready to get “more deeply” involved in resolving Europe’s debt crisis.

The summit had been delayed from late last year as European leaders struggled to deal with an escalating debt crisis.

The remarks from China are big on positive sentiment but low on details. However, the upbeat sentiment boosted currency markets and stock markets yesterday.

China is sitting on €2.43 trillion worth of foreign exchange reserves and is the only bloc with the economic muscle left to help rescue some European governments.

The EU is China’s largest export market and Beijing wants to ensure stability to help keep growth on track in the vital export earner.

The move comes as a boost for European finance ministers, who yesterday were absorbing the news of a slowdown in Germany and continuing efforts to push Greece into delivering budget cuts in exchange for a second bailout.

Mr van Rompuy sought to reassure his Chinese hosts that they should not underestimate the strong political incentive to keep the euro zone intact.

President Hu Jintao, who was meeting Mr van Rompuy and Mr Barroso in the Great Hall of the People, repeated that China was confident Europe could overcome its difficulties.

“China is paying close attention, and supports the series of steps taken by the EU, the IMF and European Central Bank to deal with the debt crisis, and will continue to increase policy communication and co-ordination with the EU,” state radio reported him as saying.

Mr Zhou said China and other “Bric” countries – Brazil, Russia and India – were waiting until the time was right, and he urged Europe to work harder on trying to woo Chinese investors.

“We also hope that the euro zone and EU can innovate their mechanisms to offer new products that are more helpful for Sino-Europe co-operation,” he said.

China and other countries outside the euro area want to see its members stump up more money before they commit additional resources to the IMF, which had requested an additional €500 billion in funding.

Mr Zhou said China’s leadership had already promised European heads that it would not cut its euro exposure. “Some people had cast doubt or suspicion over the currency, but for the People’s Bank of China, we have always been confident in the euro and its future,” he added.

China’s euro bond holdings are believed to be focused on Germany and France, and are much smaller than its holdings of US debt. China is believed to have bought Irish sovereign debt, but again, the amount is unknown.

About a quarter of China’s foreign exchange reserves are held in euro, while 70 per cent are in dollars. Any bigger role in solving the debt crisis would be through the International Monetary Fund and the European Financial Stability Facility, Mr Zhou said.

There is considerable unease among many people in China, which is still a developing economy, about why Beijing should be helping to bail out a rich economic bloc which has some of the world’s wealthiest economies, including Germany and France.

China also wants the EU to give China full market economy status.