China urges EU to reach debt deal without delay

By Chris Buckley and Kevin Yao


European Union

"We hope that the EU countries concerned will reach a comprehensive settlement plan as soon as possible and adopt effective measures to ease the euro debt crisis and prevent the crisis from spreading further," Foreign Ministry spokeswoman Jiang Yu told reporters.

"China is confident that the EU has the ability and wisdom to overcome these straits. We have always provided what help we can to the countries concerned via bilateral and multilateral channels."

At a summit on Sunday, European Union leaders neared agreement on bank recapitalization and discussed how to leverage up the 440 billion euro ($600 billion) European Financial Stability Facility crisis fund to stave off bond market contagion.

Sharp differences remain, however, over the size of losses private holders of Greek government bonds will have to accept and how to scale up the EFSF without EU governments contributing more capital themselves. Final decisions were deferred until a second summit on Wednesday.

The mostly likely method for leveraging the euro zone's bailout fund involves using it to provide bond insurance while combining its firepower with a special purpose vehicle (SPV) drawing in cash from China or Brazil, EU officials said.

Jiang declined to comment on that idea, saying her ministry was not the appropriate agency to answer such a question.

"In principle, we support the efforts of the EU countries concerned in addressing this crisis," she said.

Quite why China would choose to fund an SPV scheme that guaranteed to take losses in the event of a debt restructuring or default in the euro zone left some investment bank economists puzzled.

China already has an estimated 600 billion euro exposure to euro zone debt, courtesy of the 25 percent or so of its $3.2 trillion of foreign exchange reserves that analysts believe to be invested in euro-denominated assets.


"As for whether China will continue to buy European debt really depends on what types of debt are on offer -- for countries that have been hit hard by the debt crisis, the risk is probably too high," said He Fan, an economist at the Chinese Academy of Social Sciences, a top government think-tank.

"But we could do it under a multi-lateral framework; for example, we lend money to the IMF and let the IMF buy European debt. Bonds linked to the EFSF are safe but probably we haven't bought much because their yields are too low."

However a substantial investment in a new SPV, even via an entity backed by the International Monetary Fund, appears to some analysts an expensive way of insuring that exposure.

Tens of billions of euros would be required to give the EFSF the 1 trillion euro-plus firepower that economists say is needed at a minimum to safeguard the euro zone financial system.

Meanwhile there were precious few details emerging from Europe as to how any SPV might be structured.

Chinese Premier Wen Jiabao urged Europe on Friday to stop its debt crisis from spreading across the bloc, warning that fundamental reforms were needed to staunch the euro zone's troubles, in comments made after the two sides postponed an annual summit.

Jia will "reiterate China's confidence in Europe's ability to cure the current financial malaise as well as Beijing's willingness to assist the debt-ridden continent in grappling with the challenge," Xinhua said in a commentary.

Jia will also go to the Netherlands and Germany.

China's relative lack of options on where to store its vast reserve of foreign exchange wealth give it strong reasons to press Europe to surmount divisions, contain the debt crisis and thereby protect Beijing's stake in its biggest trade partner.

The euro bloc's crisis has already taken a toll on Chinese exports, which grew at their slowest pace in seven months in September. Exports were a net drag on China's economic growth in the first nine months of this year.

China's top leaders have voiced regular support for European efforts to solve the debt crisis, though many analysts now say there are better ways for China to support Europe and its own economy than simply buying up high risk debt from euro zone governments struggling to stay solvent.

"Premier Wen Jiabao has always said China will help Europe tide over the current difficulties," said Lin Tun, an economist at China International Capital Corp, China's top investment bank.

"I don't think buying bonds is the only and best option for China at all. There are plenty of physical assets and other high-quality assets in Europe."

(Reporting by Ben Blanchard and Chris Buckley; Editing by Nick Edwards and Ken Wills)