CHINESE REACTION:CHINA SHOULD refrain from buying bonds from European governments and reduce dollar holdings in its foreign exchange reserves, said Yu Yongding, a former adviser to the communist state's central bank.
“We should not buy European bonds and there should be conditions for us to buy,” said Mr Yu, who is an influential economist in the Chinese Academy of Social Sciences. He did not elaborate on the conditions.
With about a quarter of its $3.2 trillion (€2.3 trillion) foreign exchange reserves in euros, China has repeatedly voiced confidence in the euro zone. However Beijing has been reluctant to reveal, or even to confirm, measures it would take to support Europe.
Chinese leaders have pledged their support for Europe, although the premier Wen Jiabao has pushed for the EU to recognise China as a market economy.
Beijing’s anxieties about the euro zone’s sovereign debt crisis are mounting. The world’s second-largest economy fears the crisis could trigger friction in trade relations and have a negative impact on China’s exports.
Moreover, senior advisers say it will keep buying US treasuries because the euro zone’s woes make the dollar a safer bet.
At the same time Bank of China, a big market-maker in the country’s onshore foreign exchange market, has reportedly stopped forex forwards and swaps trading with several European banks due to the deepening debt problem.
News of Beijings’s growing scepticism about Europe’s efforts to escape its debt woes comes as the European Union looks set to ask China to boost domestic demand as part of global efforts to get growth back on track.
The European banks affected include French lenders Société Générale, Credit Agricole and BNP Paribas. Bank of China halted trading with them partly because of the downgrade of these entities by Moody’s ratings agency, Reuters news agency reported, citing sources.
Bank of China has also stopped trading with UBS after it lost €1.7 billion in a rogue trading scandal. It is the latest sign that China and its state institutions are seeking to minimise their exposure to the euro zone as fears grow of default by Greece or another peripheral European country.
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 debt. Beijing is believed to have bought Irish sovereign debt, but the amount is unknown.
There are ongoing talks to give China a greater role in global economic governance to reflect its growing power. Discussions include proposals to include the renminbi, the Chinese currency, in the basket that forms the Special Drawing Right – an artificial IMF currency.
However, the advanced economies have set the condition that the renminbi has to be convertible to join and China has no timetable for announcing such a move.
Beijing, meanwhile, is coming into conflict with debt-laden European countries over trade barriers, and as Washington prepares a retaliatory trade measure against China.
“As the crisis within the EU intensifies . . . bilateral trade friction may be increased, which is detrimental to China-EU economic and trade relations,” Shen Danyang, spokesman for the ministry of commerce, told a news conference in the Chinese capital.
“Of course, we believe there’s opportunity in the crisis. Everyone can work hard together to turn the crisis into an opportunity.”
Mr Shen reiterated China’s disappointment that it had not been recognised as a market economy under world trade rules by the EU.
“After 30 years of reform and opening up, China has completed the transformation from a planned economy to a market economy, but the EU still does not recognise China’s full market economy status. China is very disappointed,” he said. – (Additional reporting Reuters)
