In These New Times

A new paradigm for a post-imperial world

China stands by Europe

Posted by seumasach on May 27, 2010

Zhao, who previously worked as a researcher at the central bank, said that “cutting euro assets means the government would have to increase dollar holdings, but the U.S. dollar itself may not be a perfect option over a longer term.”


27th May, 2010

China denied as “groundless” a report that it’s reviewing foreign-exchange holdings of euro assets, and the nation’s sovereign wealth fund said it’s maintaining its European investments.

“Europe has been, and will be one of the major markets for investing China’s exchange reserves,” the State Administration of Foreign Exchange said in astatement on its website today. The official Xinhua News Agency reported China Investment Corp. President Gao Xiqing said yesterday Europe’s turmoil “hasn’t had too big of an impact” on CIC’s investment decisions.

The comments came on a day of respite for the euro, which snapped a three-day losing streak after tumbling this month to a four-year low against the dollar. Concern that Europe’s crisis will hamper a rebound in global trade has spurred traders to reduce bets that China will let its own currency appreciate against the dollar, yuan forwards showed.

“The government doesn’t have many options at the moment because global financial markets face many uncertainties,” said Zhao Qingming, a senior analyst at China Construction Bank in Beijing, the nation’s second-largest lender. “It’s hard to weigh risks from one to the other.”

Zhao, who previously worked as a researcher at the central bank, said that “cutting euro assets means the government would have to increase dollar holdings, but the U.S. dollar itself may not be a perfect option over a longer term.” The White House projects a record $1.6 trillion budget deficit this year.

Previous Episode

Should China refrain from selling its European assets, the decision would echo the judgment made on U.S. investments in the midst of the collapse in America’s mortgage market.

Chinese officials declined a “top-level approach” from Russia to mount a joint sell-off of “big chunks of their GSE holdings,” former Treasury Secretary Henry Paulson wrote in his memoir, “On The Brink.” GSEs, or government-sponsored entities, refer to U.S. housing agencies Fannie Mae and Freddie Mac, the largest American issuers of debt after the Treasury Department.

SAFE, which manages China’s $2.4 trillion of foreign exchange reserves, the world’s largest, said in its statement that “the media report that SAFE is reviewing its euro holdings was groundless,” without specifying the media to which it was referring.

The Financial Times reported yesterday that the agency was reviewing its euro region debt holdings and that its representatives had met with foreign bankers in recent days to discuss the matter.

Sliding Stocks

The Dow Jones Industrial Average closed yesterday below 10,000 for the first time since February after the report spurred concern the credit crisis in Europe may worsen.

Speculation that central banks may reduce their accumulation of euros deepened after the currency shared by 16 European Union members tumbled as low as $1.2144 on May 19, capping a 24 percent slide from its July 2008 high. The currency traded at $1.2288 as of 8:41 a.m. in London.

Non-deliverable yuan forwards fell to an eight-month low last week as investors pared expectations for the currency’s gains against the dollar. After strengthening today and yesterday, the contracts indicate the yuan will appreciate about 1.2 percent in the next year. China has held the currency at about 6.83 per dollar for 22 months as a crisis-fighting policy.

China’s $300 billion sovereign wealth fund will maintain its investments in the euro area, CIC’s Gao said according to Xinhua, which cited a May 26 interview in Paris. Gao was in the French capital to attend a forum held by the Organization of Economic Co-operation and Development.

Watching Volatility

CIC, which manages a portion of the nation’s foreign currency reserves for the administration, will “closely watch” the short-term market volatility of the euro region, Xinhua cited Gao as saying. The sovereign wealth fund will also watch the stability of the euro and changes in EU policy, Gao said in the report.

The fund is a financial investor and has no political goals, Xinhua cited Gao as saying. CIC will avoid investing in the gambling and tobacco industries and in industries that produce weapons of mass destruction, Gao was cited as saying.

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