Eurozone may look to Beijing for funds

17 january 2013

Exchanges could be held in Japan when Chinese and European financial decision-makers meet for the annual IMF and World Bank conference this week.

Some observers have warned Beijing that further investment in European bonds could be risky as there is little sign of economic recovery.

“I will meet decision-makers from Asia when I am in Japan soon,” said Klaus Regling, managing director of the new bailout fund, the European Stability Mechanism, on the sidelines of the fund’s inauguration on Monday.

European politicians cheered the fund’s establishment as a milestone after years of struggling to find a sovereign debt solution.

Regling said the European Union needs steady support from major Asian creditors such as China and Japan.

“I am confident that the relationship with “traditional and good” Asian customers will continue when the ESM issues bonds,” he said,

He added that Asian countries had on average purchased 40 percent of bonds issued by the ESM’s predecessor, the European Financial Stability Fund.

Regling’s comments come on the heels of a September summit between Beijing and Brussels, where Premier Wen Jiabao said China had offered substantial support to debt-ridden European countries via the IMF, EFSF and some key sovereign wealth funds of specific countries, and would provide more.

Chinese ambassador to Belgium Liao Liqiang repeated Beijing’s commitment last week, saying China would offer more financial support once the ESM was operational.

Official data on China’s total buying of European bonds is not available. However, some figures show that Chinese and Japanese institutions were major buyers.

There are no imminent plans for the ESM to issue bonds, but once it does, Asian countries will likely continue their previous level of European bond investing, Regling said.

However, Duncan Freeman, a senior researcher at Brussels Institute of Contemporary China Studies warned over the possibility of China buying more European bonds.

“Risk is a key factor for the Chinese government,” he said.

“Since the crisis began, the EU has failed to adopt coherent policies to resolve the problems and while the ESM is a step forward, China will want greater clarity before committing itself to supporting the ESM in a significant way.”

Karl Aiginger, president of the Austrian Institute of Economics Research, said China’s strategic involvement in the ESM would be more than welcome.

“What I can say today is that China investing strategically in Europe is exactly what we want. Certainly, Europe welcomes Chinese investment a lot,” he said.

Aiginger added that China could diversify its foreign exchange reserves by investing in ESM bonds directly or via the IMF.

“Europe will stabilize the whole world. If Europe is recovering, it will be beneficial to everywhere else. In this way, it is very positive and beneficial to stabilize the euro zone,” he said.

At present the ESM is too small, according to Aiginger.

“I would feel safer if it was doubled, or tripled and to have more different sources not only from Europeans, the European Central Bank and European governments, but also from long-term investors,” he said.

The ESM is a permanent “firewall” meant to preserve financial stability in the euro zone by providing emergency help to troubled members through the issuance of bonds or other debt instruments on behalf of the entire zone.