China shows appetite for EFSF bond issue despite official's note of caution

THE DEBUT bond from Europe’s financial rescue fund attracted robust demand, despite a senior Chinese government adviser warning that China should be wary of buying euro zone bonds directly until the euro zone works out a permanent crisis resolution mechanism to avoid “turning good money bad”.

Yu Yongding, a former member of the monetary policy committee of the People’s Bank of China, wrote in the China Daily that figures for Ireland and Greece “didn’t add up”.

Describing interest as “exceptionally strong”, the European Financial Stability Fund said its bond sale had attracted orders from more than 500 investors totalling €44.5 billion – roughly nine times the €5 billion of paper on offer. Demand from Asian investors was particularly robust, with the Japanese government buying over 20 per cent of the issue. The money will be lent on to Ireland at a higher rate of interest.

“The huge investor interest confirms confidence in the strategy adopted to restore financial stability in the euro area,” said the EFSF’s German chief executive, Klaus Regling.

China said recently it is ready to assist European countries in overcoming their present debt crisis, and Europe will remain a key market for the investment of China’s enormous foreign exchange reserves.

“As for the euro zone, while voicing its strong support, China must urgently seek clarification on whether its current holdings of periphery debt will be part of any restructuring plans,” Mr Yongding wrote in the China Daily.

“According to market observers, the numbers for Ireland and Greece don’t add up. Until such clarification is provided, or the euro zone comes up with a permanent resolution mechanism, I do not think China should commit itself to supporting the euro zone by buying government bonds directly, because of the risk of turning good money bad,” said Mr Yu, a senior researcher at a government think tank, the Chinese Academy of Social Sciences.

China has reportedly committed to buy about €6 billion worth of Spanish sovereign debt, and €1.1 billion worth of medium-term bonds from the Portuguese government in a private placement. China is also planning to invest €4 billion to €5 billion in Portuguese bonds to help Portugal refinance €15 billion worth of debt due to expire before April.

“In aggregate terms, though, the euro zone remains an attractive investment destination, with a strong institution, for now, in the form of European Central Bank and Germany’s fiscal strength,” Mr Yu wrote.

China had foreign exchange reserves at the end of last year of nearly €2.1 trillion and it is the world’s largest holder of US treasury bonds, although Mr Yu also said China will reduce its purchases of US bonds.