China says it can’t use forex reserves to save Europe

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BEIJING: Europe cannot expect China to use a big portion of its US$3.2 trillion foreign exchange reserves to rescue indebted nations, a top Chinese foreign ministry official said, Beijing's strongest rebuttal yet to suggestions it should bail out the eurozone.

Vice-Foreign Minister Fu Ying said at a forum the argument that China should rescue Europe did not stand and that Europeans might have misunderstood how China managed its reserves.

She did not explicitly rule out using part of China's reserves for more targeted measures, but implied China was not going to ride in with a big chunk of its “savings” and bail out crisis-stricken Europe.

“We cannot use this money domestically to alleviate poverty,” Fu said. “We also can't take this money abroad for development support.”

Economists estimate that Beijing has already invested a fifth of its reserves in euro assets.

While the size of China's reserves is the largest in the world, analysts say two-thirds of that is locked up in dollar assets that cannot be sold, giving Beijing a more modest portion of about US$470bil to invest each year.

Fu said China's reserves were akin to the country's savings and that the 1997 Asian financial crisis taught Beijing how important reserves were to the nation.

China's foreign ministry does not exert direct influence over how the country invests its foreign exchange reserves but can comment on that policy.

Fu said Beijing's refusal to use its reserves to ease Europe's debt woes did not count as a lack of support for the region, which was also China's biggest export market.

“I say the idea that China should save Europe does not stand. What I mean is the money cannot be used this way,” Fu said. “China has never been absent from any international efforts to help Europe. We have always been an active participant, and a healthy particpant as well.”

As the owner of the world's largest foreign exchange reserves, China is one of the few governments with pockets deep enough to buy a sizeable portion of European government debt and help pull the region from its economic malaise. - Reuters

China says it can't use forex reserves to rescue Europe

02-Dec-11, 8:41 PM | Agence France Presse

BEIJING - China's vice foreign minister on Friday ruled out using the nation's vast foreign exchange reserves to bail out Europe, as the debt-laden continent tries to stave off the risk of a massive default.

"The argument that China should rescue Europe does not stand," vice foreign minister Fu Ying told an EU-China forum.

"We cannot use foreign reserves for... rescuing foreign countries. We need to ensure safety, liquidity and profit for the foreign reserves."

European leaders have lobbied China, the world's second largest economy, to help struggling eurozone countries by contributing to a bailout fund, but so far Beijing has not made a firm commitment.

The Asian powerhouse, which has the world's largest foreign exchange reserves at $3.2017 trillion, has said it is keen to seek more investment opportunities in Europe, but has held back from agreeing to contribute to the fund.

Fu pointed to China's purchase of European bonds, increased imports and expanded investment in the continent, which would "create jobs and restore growth".

But she insisted China was not seeking to use its considerable financial clout to exert power over the continent.

"China is no old-fashioned power or empire. China has no intention of seeking power through financial means," she said.

China's commerce minister Chen Deming said last month Beijing would lead an investment delegation to Europe next year, and the head of China's sovereign wealth fund has said it is keen to invest in European infrastructure.

But some in Europe have expressed concern about the potential cost of accepting Beijing's help.

In October, Francois Hollande, the Socialist candidate for next year's French presidential elections, asked if China was really "riding to the rescue of the euro... without making any demands in return?"

Fu also reiterated China's confidence in Europe, just as European leaders prepare to meet at a summit next week that some have billed as their last chance to restore the credibility of eurozone economic governance.

"We have reason to believe that Europe has the wisdom, capacity and resources to make it this time by accelerating adjustment and reform," she said.

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Euro, death approaching soon ?

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Death of a currency as eurogeddon approaches

It's time to think what hitherto markets have regarded as unthinkable – that the euro really is on its last legs.

They need to wake up fast; it's happening before their very eyes. In its current form, the single currency may always have been doomed, but it has been greatly helped on its way by an extraordinarily inept series of policy errors. Photo: AFP

 By Jeremy Warner, Associate editor - Telegraph

The defining moment was the fiasco over Wednesday's bund auction, reinforced on Thursday by the spectacle of German sovereign bond yields rising above those of the UK.

If you are tempted to think this another vote of confidence by international investors in the UK, don't. It's actually got virtually nothing to do with us. Nor in truth does it have much to do with the idea that Germany will eventually get saddled with liability for periphery nation debts, thereby undermining its own creditworthiness.

No, what this is about is the markets starting to bet on what was previously a minority view - a complete collapse, or break-up, of the euro. Up until the past few days, it has remained just about possible to go along with the idea that ultimately Germany would bow to pressure and do whatever might be required to save the single currency.

The prevailing view was that the German Chancellor didn't really mean what she was saying, or was only saying it to placate German voters. When finally she came to peer over the precipice, she would retreat from her hard line position and compromise. Self interest alone would force Germany to act.

But there comes a point in every crisis where the consensus suddenly shatters. That's what has just occurred, and with good reason. In recent days, it has become plain as a pike staff that the lady's not for turning.



This has caused remaining international confidence in the euro to evaporate, and even German bunds to lose their "risk free" status. The crisis is no longer confined to the sinners of the south. Suddenly, no-one wants to hold euro denominated assets of any variety, and that includes what had previously been thought the eurozone safe haven of German bunds.

Investors have gone on strike. The Americans are getting their money out as fast as they decently can. British banks have stopped lending to all but their safest eurozone counterparts, and even those have been denied access to dollar funding. The UK hardly has anything to boast of; it's got its own legion of problems, many of them not so dissimilar to those of the eurozone periphery.

But almost anything is going to look preferable to a currency which might soon be assigned to the dustbin of history. All of a sudden, the pound is the European default asset of choice.

What we are witnessing is awesome stuff – the death throes of a currency. And not just any old currency either, but what when it was launched was confidently expected to take its place alongside the dollar as one of the world's major reserve currencies. That promise today looks to be in ruins.

Contingency planning is in progress throughout Europe. From the UK Treasury on Whitehall to the architectural monstrosity of the Bundesbank in Frankfurt, everyone is desperately trying to figure out precisely how bad the consequences might be.

What they are preparing for is the biggest mass default in history. There's no orderly way of doing this. European finance and trade is too far integrated to allow for an easy unwinding of contracts. It's going to be anarchy.

It's worth stressing here that for the moment the contingency planning is confined to officialdom. This week, for instance, we've had the Financial Services Authority's Andrew Bailey admit that he's asked UK banks to plan for a disorderly breakup of the euro. He'd be failing in his duties if he hadn't. Europe's political elite, as ever several steps behind the reality, still regards the prospect as unimaginable.
They need to wake up fast; it's happening before their very eyes. In its current form, the single currency may always have been doomed, but it has been greatly helped on its way by an extraordinarily inept series of policy errors.

First there was the disastrous suggestion from Angela Merkel and Nicolas Sarkozy that if Greece didn't buckle under it might be chucked out. Markets reacted logically, which was to sell bonds in any country that looked vulnerable and chase "safe haven" assets, thereby making it much harder for governments to fund themselves.

The blunder was compounded by attempts to underpin confidence in the banking system by forcing banks to mark their sovereign debt to market. This may only have recognised the reality, but it also destroyed the concept of the "risk free asset", forcing banks for the first time to apply capital to their sovereign debt exposures. Unsurprisingly, they stopped buying sovereign bonds, again making it harder for governments to fund themselves.

But perhaps the biggest sin of the lot was effectively to render all credit default swaps (a form of insurance against default) on sovereign debt essentially worthless, or void, by making the Greek default "voluntary".

This has made it impossible to hedge against eurozone sovereign debt purchases, and thereby destroyed the market. Worse, it's made investors believe that the euro cannot be trusted, that it'll repeatedly find ways of reneging on contract. That's the point of no return. This is no longer a serious currency.