Just like practically every other investor in the world, China — which boasts the world’s largest forex reserves – is undoubtedly concerned about the increasingly bleak outlook for eurozone sovereign debt.
But that is not something Beijing – under pressure on its own currency — would care to admit to the world.
Indeed, Chinese officials were in full damage-control mode on Thursday, playing down an FT report that they have started reviewing holdings of eurozone debt.
On its Chinese-language website (but interestingly, not on its English website) China’s State Administration of Foreign Exchange, or SAFE, posted a statement saying the story “had no basis”. “Europe has been, and will continue to be one of the key markets for investing China’s exchange”, it added.
Reinforcing that view, CIC — China’s $300bn sovereign wealth fund — said eurozone market volatility “hasn’t had too big of an impact” on investment, reported Bloomberg, citing Xinhua news agency.
However, CIC, which manages a part of China’s forex reserves, would “closely watch” the short-term market volatility of the eurozone and any changes in EU policy, CIC chairman Gao Xiqing said, according to Xhinhua.
We bet they’ll be watching.
But, with the US having lately softened its previously strident calls for China to appreciate its currency – and amid growing Chinese concerns about the vulnerability of its export markets to financial turmoil - now is clearly not the time to confirm reports that it would like to shift out of eurozone sovereign debt holdings.
Besides, Zhao Qingming, a senior analyst at China Construction Bankg and former researcher at China’s central bank, told Bloomberg on Thursday: “Cutting euro assets means the [Chinese] government would have to increase dollar holdings, but the US dollar itself may not be a perfect option over a longer term.”
Should China refrain from selling its European assets, Bloomberg added, “the decision would echo the judgment made on US investments in the midst of the collapse in America’s mortgage market”.
Even so, we’re quite sure China’s policymakers are more than a little concerned about continuing eurozone turmoil and its impact on their euro debt investments.
The FT report said that SAFE, which holds an estimated $630bn of eurozone bonds in its reserves, was worried about its exposure to the five so-called peripheral eurozone markets of Greece, Ireland, Italy, Portugal and Spain.
But concern about the so-called peripherals is a concern about the eurozone as a whole, and that was the issue the FT said dominated Chinese officials’ meetings with foreign bankers in Beijing in recent days.
Regardless of SAFE’s denials and CIC’s endorsement of eurozone , the failure on Wednesday of Germany’s auction of 5-year Bunds could hardly have helped its confidence. As we noted: “So much for a European Sicherhafen (safe haven)”.
An estimated 70 per cent of China’s reserves are held in US dollar securities, but the composition and management of the funds controlled by Safe are regarded as state secrets. However, the FT noted, citing analysts:
Safe rarely cuts its existing holdings significantly as it has so much new money to invest every month. Instead, it reduces the proportion of new investment it devotes to a particular asset, thereby reducing the weighting of that asset in its overall portfolio.
According to Safe’s latest figures, China’s foreign exchange reserves totalled $2,447bn at the end of March, up $174bn in just six months – thanks partly to strong capital inflows, a large trade surplus and restrictive cross-border capital controls, and also to dollar appreciation which boosted China’s US holdings.
And China would surely like its reserves to stay on an upward trajectory.
But the euro’s recent slide – and accompanying fears about eurozone debt – has pushed the renminbi up to an eight-year high against the single currency, damaging Chinese exporters’ competitiveness and prompting traders in the forwards markets to predict a fall in the renminbi against the dollar.
For now, then, it’s unlikely China will revalue its currency, as the FT reported on Wednesday. As Neil Mellor at Bank of New York Mellon, told the paper:
“That is what is behind the move in the forwards market,” he said. “Exporters are China’s main concern and the authorities are not going to put them in jeopardy.”
And it would seem from Thursday’s denials, Beijing is not going to put its public position on eurozone debt in jeopardy either.
Related links:
Sin0-American summit – Lex
The illusory China-selling-TIC data – FTAlphaville
China’s US holdings ‘normal’ - FT