06/21/2011, 00.00
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China buying Euro debt

As Premier Wen Jiabao prepares to visit Great Britain, Hungary and Germany, Beijing says it will “continue helping European countries” realise stable economic growth. It also pledges to buy Eurobonds. However, China too is facing major economic problems, as its growth slows down and inflation surges.
Beijing (AsiaNews/Agencies) – China is going to help debt-ridden Europe by buying Euro bonds in lieu of dollar-labelled securities as it has done for years. This way it will help Europeans realise stable economic growth, Foreign Ministry spokesperson Hong Lei said a few days before Prime Minister Wen Jiabao starts a visit to Hungary, Great Britain and Germany on 24-28 June.

“The Chinese government has already taken a series of proactive measures to push Sino-Europe trade and economic co-operation, such as buying euro bonds,” Hong said. “China is willing to continue helping European countries realise economic growth in a stable manner through co-operation with relevant countries”.

Wen's latest visit to Europe will come months after he visited France, Portugal and Spain (pictured), offering to help European economies overcome their crises.

China signalled in April that it could buy more debt from the euro zone's weaker states. There are no precise figures, but China has said it has already bought billions of Euros of debt.

Still, last week China's central bank urged European governments to contain debt levels or risk worsening the region's unfolding debt crisis.

China's interest in a smooth resolution to the European debt troubles has been clear. Of its US$ 3 trillion or more in foreign exchange reserves, about a quarter are estimated to be invested in euro-denominated assets.

China’s foreign exchange reserves expanded by around US$ 200 billion in the first four months of the year, with three-quarters of the new inflow invested abroad in non-US dollar assets, the bank estimated.

The proportion of US dollar assets remains relatively steady at between 60 and 70 per cent of the total.

At the same time though, China’s economy grew at a slower pace as indicated by the difficulties faced by two of its four major banks.

Share of the China Construction Bank (CCB) was down 2.7 per cent to a nine-month low, whilst the Agricultural Bank of China (AgBank) lost 3.8 per cent.

"The risk of a hard landing for the Chinese economy is increasing," said Alexander Lee, a Hong Kong-based analyst at DBS Vickers. "The Japanese earthquake, a slow US economy, the Euro zone problems and a slowing Chinese economy are all building up on the banking sector."

CCB is China's largest mortgage lender and the government is taking increasingly heavy-handed measures to cool real estate prices, thus reducing overall lending.

AgBank is the biggest lender to rural causes and has the highest non-performing loan ratio and lowest capital adequacy ratio among the big four lenders, raising worries that it may need fresh capital if the government tightens capital requirements.

Beijing has been trying to cut lending fearful that easy money could bolster speculation rather than investment. Nonetheless, lending remains high partly because the country's top banks provided many of the loans as part of a giant economic stimulus programme launched by Beijing in late 2008 to counter the global financial crisis.

“There are signs of an economic slowdown in China, and we believe that this may not be just a transient problem as the situation is much more complex with structural problems,” Credit Suisse analysts Vincent Chan and Peggy Chan wrote on Monday.

Many experts believe that Beijing must change its export-oriented development model and focus instead on domestic consumption as well as fight corruption (which causes huge losses). They also note that it must cut the size of state-owned companies and reduce inflation, which is negatively affecting the middle class.
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