China signalled on Thursday it was ready to buy more debt from the euro zone’s weaker states, in a move to help stabilise the bloc’s fragile finances and protect its business interests.
After investing billions of euros in Portuguese and Greek bonds to diversity its “huge” foreign exchange reserves away from the dollar, China was now considering buying more, Song Zhe, Beijing’s ambassador to the European Union, said.
China was also in talks to invest in Spain, including in the reorganisation of troubled Spanish savings banks, the Ministry of Foreign Affairs said earlier in Beijing. [ID:nL3E7FL1L9]
China is keen to diversify its currency reserves — which rose in the first quarter to $3.05 trillion — with the euro the primary alternative to the dollar, which accounts for around two thirds of its holdings. [ID:nTOE70B03C]
But Daniel Gros, a euro zone expert with a Brussels-based think tank, the Centre for European Policy Studies, said heavy bond buying in Europe by China was unlikely.
The foreign affairs ministry’s remarks confirmed earlier comments from Spain that Madrid and Beijing were discussing possible investments.
Worried that it too may be engulfed by Europe’s debt crisis, Spain wants to attract new capital into its banks to assure investors its financial system does not need be bailed out like Greece, Ireland and Portugal.
To that end, Spanish prime minister Jose Luis Rodriguez Zapatero visited China and Singapore last week to persuade them that Spain’s public debt and banks were a good investment.
Some confusion accompanied the trip however, after China’s sovereign wealth fund denied a comment from a Spanish government source that it may invest $9 billion in Spain. [ID:nLDE73D0YQ]
Song, meanwhile, cautioned on Thursday over any restructuring of Greek debt, which could force losses on bondholders including China, saying: “We hope governments can ensure the security of our investments.”
“The EU is China’s most important business partner,” said Song, adding that Beijing has an interest in “the stability of the European economy and early recovery from the crisis” as he reiterated his country’s support for the euro.
Outlining how China had already bought several billions of euros of Greek and Portuguese government debt, Song said: “This is still in the beginning phase. In the next step, it’s possible we will purchase more.”
‘DREAMING OF CHINA’S RESERVES’
Song’s remarks come days after Standard & Poor’s threatened to downgrade the United States’ credit rating. [ID:N18231617] China reacted by saying the United States needed to take “responsible” measures to protect investors in its debt.
“In the past, our portfolio was dominated by US Treasury bonds,” said Song. “The purpose (of diversifying) is to protect the safety of our foreign exchange reserves.
But the Centre for European Policy Studies’ Gros cautioned against expectations of a major shift in investments.
“This is the same story again,” he said. “Everybody dreams of the Chinese reserves. They think: if they just give me 10 billion, that’s enough.
“But they have never done it. And nor will they because they know if there is a restructuring (in the euro zone), they will suffer.”
Greece has been coming under mounting pressure to explore a debt restructuring, with markets increasingly factoring in it in and a government adviser for euro zone paymaster Germany describing it earlier this week as inevitable.
Buying European debt and flagging an intention to do so can also help Chinese manufacturers by driving up the value of the euro, making Chinese products cheaper to buy.- By John O’Donnell and Ben Blanchard