China helps take pressure off euro

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BRUSSELS | Spain, Portugal and Greece — three of the eurozone’s most financially shaky members — in recent months have touted a lifeline thrown to them by China: a promise to buy these countries’ embattled bonds.

The pledges from the government in Beijing temporarily took some pressure off European debt markets, but China has been quiet on how much money it will actually invest. What is clear is that China has an immense interest in helping the eurozone, its biggest trading partner, out of its current woes.

On Wednesday, Spain signed more than a dozen business accords with China, two days after Vice Premier Li Keqiang wrote in daily El Pais that his country will keep on buying Spain’s public debt as a show of support.

That follows similar deals and promises from China for already bailed-out Greece and Portugal, seen by many as the next weakest link in the 17-country eurozone.

Europe has been fighting a bruising battle to keep its currency union together. But a $148 billion rescue loan for Greece and the $90 billion bailout of Ireland have failed to erase fears that mounting debts in several member states might be too much for the struggling eurozone and could eventually even endanger the euro.

A deepening crisis in Europe or a meltdown of the euro — which already appeared to be in a state of free fall last spring — would hurt China, now the world’s second-largest economy and holder of massive foreign currency reserves, most of it in U.S. dollars.

Beijing believes that a stable global economy needs at least two lead currencies, and China already has invested heavily in European government bonds to prop up the euro as a viable alternative to the dollar, says Vanessa Rossi, a senior research fellow at Chatham House in London.

Much of China’s clout comes from its large trade surplus and the savings that result from it, a sharp contrast to the debt woes of some of Europe’s governments. Ms. Rossi estimates that of China’s massive $2.5 trillion foreign exchange reserves, close to $1 trillion are holdings in Europe.

That’s still far behind the $1.5 trillion invested in the United States, but would imply that China on average now holds about 10 percent of eurozone government debt, says Ms. Rossi.

Any new promises to buy bonds come on top of significant existing investments, and are mostly meant as a “psychological support” for the euro, Ms. Rossi says.

Yet psychological support is significant, as more confidence in government bonds means lower interest costs when indebted countries borrow and could help prevent a death spiral in which rising borrowing costs feed default fears and end with the country unable to borrow — and needing a bailout.

Beijing’s interest goes beyond the stability of the euro. A deep or prolonged economic depression in Europe — a possible consequence of a breakup of the eurozone — would hurt China, which sells about 25 percent of its exports to the continent.

Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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