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China ''white knight' savior for crisis-hit Europe

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BEIJING (AFP) - China, already the banker to the United States and a major investor in emerging markets, is now positioning itself as the potential "white knight" saviour to debt-laden Europe, analysts say.

Beijing has vowed to support European countries struggling under mountains of debt by buying their government bonds, which experts say could help ease tensions over a range of trade issues as well as boost China's global standing.

Backing the euro also serves the Asian country's own interests by helping to ensure its biggest trade partner continues buying its exports while also diversify its world-leading foreign exchange holdings away from the dollar.

Chinese foreign ministry spokeswoman Jiang Yu told reporters on Thursday that the European Union would "be one of the major markets for our forex investment" in the future.

European officials however insist no incentives such as recognition of China's market economy status or a reconsideration of an arms embargo have been offered in return for Beijing's much-needed financial lifeline.

"On the one hand they get to be the white knight and maybe that has some political benefit," Patrick Chovanec, an economics professor at Tsinghua University in Beijing, told AFP.

"It also fits with their plan to diversify away from the US dollar."

Boosting its holdings of euro bonds is a good investment for China and could ease pressure on Beijing over its yuan exchange rate controls and restrictions on rare earth exports, analysts said.

Beijing has the world's largest foreign exchange reserves at 2.648 trillion dollars, with a large chunk -- nearly 907 billion dollars -- parked in low-yielding US Treasuries.

Amid the financial crisis, China has tried to diversify its holdings to improve returns, and a growing portion is being invested in euro-denominated assets as well as in sovereign debt in other Asian countries such as Japan.

Saddled with heavy debt and huge public deficits, countries such as Portugal and Greece have been forced to offer higher interest rates to attract investors to their sovereign bonds.

"Of course they are higher risk but they are higher return... and the additional risk to the whole (investment) portfolio is very small," Ken Peng, a Beijing-based economist for Citigroup, told AFP.

While China has pledged to buy bonds from Greece and Portugal, it has not yet made any concrete commitments on the size of its investment.

A report in Portuguese newspaper Jornal de Negocios said Wednesday that Beijing was ready to buy up to five billion euros (6.5 billion dollars) of Lisbon's sovereign bonds.

Exact figures on the size of China's euro holdings are hard to find, but analysts estimate its stockpile of bonds from debt-laden states is relatively small, with most holdings in large countries such as Germany and France.

"The Chinese have bought a small amount of Greek debt, in the range of several hundred million euros -- that's rather insignificant -- and a few billion euros in Portuguese debt," said Patrick Artus, chief economist at French bank Natixis.

"Their motivation seems more geopolitical and strategic rather than financial."

During Sino-EU trade talks this week, China said it backed measures taken by the EU and the International Monetary Fund to ensure eurozone stability, though the commerce minister expressed concern about how the crisis would be stemmed.

But China gave no indication during those talks that it would buy more bonds from Portugal, Spain, Belgium and Italy, which are seen as being at risk, a spokesman for EU economic and monetary affairs commissioner Olli Rehn said.

Nor were any incentives offered in return for China's support, said the spokesman, Amadeu Altafaj.

There was "nothing of an exchange or negotiation whatsoever," Altafaj told AFP.

While backing the euro may not win China its much-desired market economy status or a lifting of the EU arms embargo imposed after the 1989 Tiananmen Square crackdown, it will improve its worldwide status, analysts say.

"The global image of the developing bailing out the developed world will likely prove enough for China to go ahead with an assistance package," Alistair Thornton, China analyst for IHS Global Insight, told AFP.

"They yearn respect and this would bring it in spades."

 

Last Updated (Thursday, 23 December 2010 12:04)

 

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