China May Invest Tens of Billions of Euros

[Barron]

China may “move shortly” to help Europe resolve its debt crisis by providing an investment of as much as 100 billion euros ($132 billion), said Yuan Gangming, an economist at the Chinese Academy of Social Sciences.

The money would probably go to the European Financial Stability Facility, the euro bailout fund, said Yuan, adding that the forecasts are his own and don’t necessarily represent government plans. Economists from the academy provide policy advice without direct involvement in decisions.

Helping Europe is like “hitting two birds with one stone,” Yuan said in an interview in Beijing Feb. 6. The action would have many benefits and few drawbacks, Yuan said.

China, sitting on the world’s largest foreign-exchange reserves at more than $3 trillion, has signaled a stronger willingness to aid Europe, which is the largest market for its exports. Chinese Premier Wen Jiabao traveled with German Chancellor Angela Merkel last week to Guangdong province, a hub for factories making electronics, shoes and toys for export, and said there that helping Europe would be helping China itself.

The euro traded near an eight-week high on speculation Greece is making progress on measures to secure international aid. The currency rose less than 0.1 percent to $1.3269 against the dollar as of 4:08 p.m. in Tokyo.

China may initially invest tens of billions of euros and later increase the amount to 100 billion euros or even more, said Yuan, who is also a researcher at Tsinghua University’s Center for China in the World Economy. Another option is for funds to go toward the International Monetary Fund’s bailout program, he said.
Benefits for China

Providing funds will help stabilize the crisis while allowing China to reap investment returns, improve its image and give it greater say in European and global financial talks, he said. Greek Prime Minister Lucas Papademos is currently negotiating terms for a rescue package for his nation as European leaders seek to limit contagion.

China’s investment will be “meaningful” to the market as it will ease concerns about debt default and shore up confidence, Yuan said. “It will also be a safe investment because European nations remain rich. They’ve just borrowed too much and run into temporary funding difficulties.”

Yuan said he read Wen’s comments from Merkel’s visit as showing a Chinese government that was more willing to participate in aiding Europe. Wen didn’t, as he had in the past, link the desire for Europe to recognize China as a full market economy with the nation’s willingness to help, Yuan said.

Merkel’s visit “broke a deadlock,” he said.
Wen Remarks

In September, Wen said at the World Economic Forum’s session in the Chinese city of Dalian that the nation was willing to help and added that Europe should recognize China’s market economy status before the 2016 deadline set by the World Trade Organization. “To show one’s sincerity on this issue a few years ahead of that time is the way a friend treats another friend,” Wen said at the forum.

Later in November, Vice Finance Minister Zhu Guangyao told reporters at a meeting of Group of 20 nations’ finance ministers that it’s “too soon” for China to discuss further bond purchases from Europe’s revamped rescue fund.

Speaking beside Merkel at a press briefing on Feb. 2 in Beijing, Wen said solving the European debt crisis was “urgent” and called for greater international cooperation. China is investigating how it can “be more deeply involved” in helping solve the crisis, he said.
2009 Forecast

Yuan was quoted by China Daily in March 2009 as saying China may offer $100 billion in additional funding to the IMF to help fight the financial turmoil at the time. China signed an agreement with the IMF later in the year under which the nation would buy up to $50 billion of bonds that the fund would issue to member countries.

Fitch Ratings said today that Wen’s remarks during Merkel’s visit reflect the desire to keep diversifying holdings away from U.S. Treasuries in China’s foreign-exchange investment portfolio.

Still, it may be “politically unattainable” for the euro zone to rely on outside bailout funds as the region has “sufficient” resources within its own territory to tap, Tony Stringer, managing director of global sovereigns for Fitch, told reporters today at a briefing in Beijing.

China may suffer paper losses on a “large slug” of investments in the EFSF if Fitch downgraded its rating for France, which would affect the fund’s rating, he said.

Fitch lowered the outlook on France’s AAA rating in December, while Standard & Poor’s stripped France of its top rating last month. If the bailout fund has to pay higher interest on its bonds, it may not be able to provide as much funding for indebted nations.