China talks 'friendly' but quick deal unlikely

CHINA PLAYED down expectations it would make a swift investment in Europe’s bailout schemes, as European Financial Stability Facility (EFSF) chief Klaus Regling visited Beijing to woo the world’s second-largest economy.

“Such a close bond means that when Europe is in deep crisis, China will not act like an onlooker. Instead, as a true friend and partner of Europe, China is willing to extend a helping hand and will be happy to see a quick recovery of the European economy,” the Xinhua news agency said in a commentary that ran on Sunday.

“However, amid such an unprecedented crisis in Europe, China can neither take up the role as a saviour to the Europeans, nor provide a ‘cure’ for the European malaise,” it said, adding that it was “up to the European countries themselves to tackle their financial problems”.

China has a war chest of €2.26 trillion, with the biggest foreign exchange reserve in the world and it is keen to invest its funds. However it is still likely to strike a hard bargain before investing in the EFSF.

Mr Regling said talks had been “productive” and “friendly” but he gave few details. It is thought China may pay about €70 billion into the euro zone’s €440 billion bailout fund. “We all know China has a particular need to invest surpluses,” said Mr Regling. He said a quick deal was unlikely but he was “optimistic we will have a longer-term relationship”.

China had not made any conditions about how it would buy EFSF bonds and China had been a “good and loyal” buyer so far, he said. While China’s holdings of euro bonds are not known, it is said to be focused on Germany and France, and much smaller than its holdings of US Treasuries.

Some analysts reckon about one-quarter of its holdings are in euro assets. The Chinese are also believed to have bought Irish government debt in recent weeks as yields have recovered on Ireland’s better outlook.

Deputy finance minister Zhu Guangyao said China wanted more details on the latest plan, which was struck by European leaders last week and aimed at boosting the EFSF, recapitalising struggling banks and reducing the debt burden on Greece.

“This is not investment in EFSF itself, but in its new forms of investment as guarantor or participant. Of course we must wait for the comprehensive technical structure . . . before making a decision on investment,” Mr Zhu said.

China and its state institutions have been trying to minimise their exposure to the euro zone because of fears of default by Greece or another European country.

French president Nicolas Sarkozy spoke to Chinese president Hu Jintao and said Mr Hu had expressed relief that Europe had announced a deal to tackle a debt crisis that could have taken down the entire world economy.

Any deal with China is sure to involve giving the country a greater role in global economic governance. This could involve pressure on Europe to grant Beijing market economy status or to moderate its criticisms of China’s human rights record.