China says Europe remains key market, review report groundless

China says Europe remains key market, review report groundless
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First Published: Thu, May 27 2010. 11 53 PM IST
Updated: Thu, May 27 2010. 11 53 PM IST
Beijing: Europe remains a key investment market for China’s foreign exchange reserves, the Chinese central bank said on Thursday, helping to soothe markets unnerved by a report that it was reviewing its euro-zone bond holdings.
The Financial Times said on Wednesday that China’s State Administration of Foreign Exchange (SAFE) was meeting foreign bankers because of concerns about its exposure to debt troubles in Europe.
“This report has no basis in fact,” said SAFE, the arm of the central bank that manages China’s $2.4 trillion (Rs114.24 trillion) in foreign exchange reserves, the world’s largest stockpile.
Roughly a quarter is estimated by analysts to be held in euro-denominated assets, primarily sovereign bonds. The euro has fallen at least 14% against the dollar this year, reflecting investor concerns over the euro area debt crisis.
A Chinese banker in Beijing, who has worked with the country’s reserve managers, said they were nervous about Europe’s outlook and were likely to exercise more caution about buying euros in the short term.
But Beijing has few other outlets for investing its vast cash holdings and was quick to squelch any suggestion that it was losing confidence in the euro, which would only undermine the value of its own reserves.
“China is a responsible and long-term investor in the investment of foreign exchange reserves and we always follow the principle of diversification,” it said in a statement on the central bank’s website.
“Europe was, is and will remain one of the major investment markets for China’s foreign exchange reserves,” it added.
China is confident that the euro zone would be able to overcome its difficulties, it said.
Earlier on Thursday, a government official familiar with China’s reserve management said the country remained committed to its long-standing goal of diversifying its foreign exchange reserves.
The euro, which had fallen towards a four-year low on Wednesday, jumped to a day’s high, after the official said that the direction of diversification “will not change”.
Over the past few years, when China has mentioned diversification, it has often been interpreted as referring to its objective of reducing exposure to the dollar by lifting investments in other currencies, such as the euro.
Since China’s reserves are expressed in dollar terms, when the price of the non-dollar portion falls, the overall value of the reserves declines
Victoria Bi in Shanghai contributed to this story.
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First Published: Thu, May 27 2010. 11 53 PM IST