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China Pledges to Invest in Europe Bailout Funds, Hold Euros

Pedestrians walk past the People's Bank of China in Beijing, China. Photographer: Nelson Ching/Bloomberg
Pedestrians walk past the People's Bank of China in Beijing, China. Photographer: Nelson Ching/Bloomberg

China pledged to invest in Europe’s bailout funds and sustain its holdings of euro assets, spurring gains in the currency and Asian stocks on optimism the region’s debt crisis will be overcome.

“China will always adhere to the principle of holding assets of EU sovereign debt,” People’s Bank of China Governor Zhou Xiaochuan said in Beijing today. “We would participate in resolving the euro debt crisis,” he said, echoing comments by Premier Wen Jiabao yesterday.

The remarks offer a carrot to European finance ministers, who are increasing pressure on Greece to deliver budget cuts in exchange for a second bailout. At stake for China is helping to stabilize the economy of its largest export market amid a global slowdown that has curtailed growth in Chinese shipments abroad.

“Wen and Zhou are giving the best support China can offer now, which is to send out positive messages such as promising not to cut euro assets and to buy European bonds to help bolster market confidence,” said Shen Jianguang, a Hong Kong-based economist at Mizuho Securities Asia Ltd. who previously worked at the European Central Bank. “How much and when China will buy will depend on its foreign-exchange investment strategy -- when they find the pricing and exchange rate favorable.”

The MSCI Asia-Pacific Index of shares advanced 1.9 percent at 6:43 p.m. in Tokyo, heading for the biggest increase in a month. The euro strengthened 0.3 percent to $1.3168.

‘Sincere and Firm’

Zhou’s comments, made in a speech and question-and-answer session with students, came a day after Premier Wen Jiabao said the nation is willing to get “more deeply” involved in resolving Europe’s debt crisis, although the continent must send a clearer message to show how it’s working to strengthen its finances.

“China’s willingness to support Europe to cope with sovereign debt problems is sincere and firm,” Wen said at a joint press conference yesterday in Beijing with European Union President Herman Van Rompuy. “China is ready to get more deeply involved in participating in solving the European debt issue.”

Van Rompuy said he welcomed the interest China has shown in investing in European sovereign bonds and the region’s rescue fund. Meantime, back in Europe, finance ministers are slated today for a teleconference call to prod Greece to do more to qualify for another bailout.

Debt Crisis Spreading

Even as Premier Wen and Zhou spoke of their support for Europe, the central bank warned today the region’s debt crisis will not be solved in the short term and is spreading throughout the euro area.

The crisis could trigger systemic risks to the global economy, the PBOC said in a quarterly monetary policy report posted on its website, adding that major developed economies lack credible fiscal plans. The central bank didn’t specify when the report was prepared.

China expects “those highly indebted countries to strengthen fiscal consolidation, cut deficits and reduce debt risks in light of their national conditions,” Wen said yesterday. “We hope the EU will soon reach internal consensus, make the political decision and send to the international community a clearer and a stronger message of policy responses.”

Chinese officials are taking their message of support for Europe to the U.S. where Vice President Xi Jinping is on a five-day visit.

Right Time

The two countries have been in “close policy communication” on the European debt crisis, Vice Finance Minister Zhu Guangyao said at a briefing yesterday in Washington. “Both China and the U.S. hope that the financial stability and economic recovery will be restored in Europe at an early date,” he said.

In Beijing, Governor Zhou said that while the five BRICS countries - Brazil, Russia India, China and South Africa - all hold a “very positive attitude” toward helping Europe, they have to wait for the right time and right opportunity to invest.

China hopes for more “innovation” from Europe to provide more lucrative products that are “truly appealing” to Chinese investors, Zhou said, reiterating comments by Premier Wen.

The nation has been wooed by European leaders to help fund the temporary European Financial Stability Facility and its permanent successor, the European Stability Mechanism.

More Details

China is considering funding options for the EFSF and the ESM through the International Monetary Fund, Wen said on Feb. 2 after meeting German Chancellor Angela Merkel in Beijing. Officials previously said they needed more details on any plan to contribute funds.

Zhou said today that China can channel its investments through three avenues. The central bank can participate through foreign-exchange reserves it manages and a second option is support from China Investment Corp., the country’s sovereign-wealth fund.

The third source of help could come from financial institutions including China Development Bank and Export-Import Bank of China, and other institutional investors including Chinese enterprises, Zhou said.

China, which holds the world’s largest foreign-exchange reserves of $3.18 trillion, has previously signaled it wants to diversify the holdings away from U.S. dollar-denominated assets. The country doesn’t publicly disclose a breakdown of its reserves.

Maintain Investment

The PBOC has “always had confidence in the euro’s outlook” and as China’s foreign-exchange reserves have increased, the nation has “adjusted and increased the proportion of investment in the euro,” Zhou said.

Government leaders have “expressed clearly” through the Group of 20 nations that China will not reduce the proportion of its investment in euro assets during the global financial crisis and European debt crisis, Zhou said.

Moody’s Investors Service cut the debt ratings of six European countries on Feb. 13, including Italy, Spain and Portugal, and said it may strip France and the U.K. of their top Aaa ratings, citing Europe’s debt crisis.

Spain was downgraded to A3 from A1 on Feb. 13, Italy to A3 from A2 and Portugal to Ba3 from Ba2, all with negative outlooks. Slovakia, Slovenia and Malta also had their ratings lowered.

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