China worried about EU, urges action on debt

By Langi Chiang

MANADO, Indonesia (Reuters) - China is worried about challenges that the Europe Union faces in the next two months and urged the bloc as well as the United States to hold down government debt, its trade minister said on Friday.

Speaking at a meeting of Southeast Asian trade ministers, Chen Deming called on governments in the United States and Europe, China's top two trading partners, to act responsibly and get their fiscal houses in order.

"We support stabilizing measures taken by relevant countries, but we hope these countries will take measures to control their government debt proportion and take bigger responsibilities," Chen said.

"We are also concerned about new challenges facing European countries in August and September," he said, but did not elaborate.

His remarks echo recent comments from Beijing, which has invested nearly all of its $3.2 trillion foreign exchange reserves, the world's largest, in dollars and euros and would loathe to see the currencies plummet on economic problems.

World financial markets have swung wildly in the past week on fears the United States may fall into another recession and that Europe cannot contain its debt crisis.

Chen noted that the world is still struggling with excess cash left behind by the loosening of monetary and fiscal policies during the 2008 financial crisis, and said Asian governments should work together to monitor the impact.

"Where would the excessive liquidity flow to? Commodities, stock markets or bond markets? We are not quite sure yet," Chen said.

On the yuan, a controversial issue among China and its trade partners, Chen reiterated Beijing's usual refrain that the currency should only rise gradually.

"We will make our own decisions and will stick to restructuring reforms of the domestic economy," Chen said, noting that China faces an "extremely complicated situation" right now.

"We will also stick to the gradual and steady currency reform," he said.

Chen's remarks come amid market talk that China may be about to shift its policy stance on the yuan soon after guiding the currency to a series of record highs. <CNY/>

A flurry of Chinese media reports that predicted speedier gains in the yuan have also fueled speculation.

China keeps the yuan on a tight leash as it worries any sharp gains could hurt its exports and weigh on the world's second-biggest economy.

Its trade partners, however, accuse Beijing of deliberately suppressing the yuan for trade advantage, an allegation that China has always denied.

Indeed, new data from Washington that showed the U.S. trade gap with China grew almost 12 percent in the first six months of 2011 could fuel efforts in Congress to get tough with China's currency practices.

(Reporting by Langi Chiang; Writing by Koh Gui Qing; Editing by Neil Chatterjee)