China Says Reports on Euro Holdings Review Groundless (Update3)

By Bloomberg News
May 27 (Bloomberg) -- China denied as "groundless" a report that it’s reviewing foreign-exchange holdings of euro assets, and the nation’s sovereign wealth fund said it’s maintaining its European investments.
"Europe has been, and will be one of the major markets for investing China’s exchange reserves," the State Administration of Foreign Exchange said in a statement on its website today.
China Investment Corp. President Gao Xiqing said yesterday that his fund doesn’t plan to reduce investments in Europe as a result of its recent sovereign debt crisis.
"We will keep our allocation in Europe," Gao said at an Organization for Economic Cooperation and Development conference in Paris. "For a while our people were debating whether we should underweight Europe because of what was happening in the past few months. Our conclusion is that we are not going to underweight it, but we’re not going to overweight it, either."
The comments came on a day of respite for the euro, which snapped a three-day losing streak after tumbling this month to a four-year low against the dollar. Concern that Europe’s crisis will hamper a rebound in global commerce has spurred traders to reduce bets that China will let its own currency appreciate against the dollar, yuan forwards showed.

Few Options

"The government doesn’t have many options at the moment because global financial markets face many uncertainties," said Zhao Qingming, a senior analyst at China Construction Bank in Beijing, the nation’s second-largest lender. "It’s hard to weigh risks from one to the other."
Zhao, who previously worked as a researcher at the central bank, said that "cutting euro assets means the government would have to increase dollar holdings, but the U.S. dollar itself may not be a perfect option over a longer term." The White House projects a record $1.6 trillion budget deficit this year.
Should China refrain from selling its European assets, the decision would echo the judgment made on U.S. investments in the midst of the collapse in America’s mortgage market.
Chinese officials declined a "top-level approach" from Russia to mount a joint selloff of "big chunks of their GSE holdings," former Treasury Secretary Henry Paulson wrote in his memoir, "On The Brink." GSEs, or government-sponsored entities, refer to U.S. housing agencies Fannie Mae and Freddie Mac, the largest American issuers of debt after the Treasury Department.

Financial Times Report

SAFE, which manages China’s $2.4 trillion of foreign- exchange reserves, the world’s largest, said in its statement that "the media report that SAFE is reviewing its euro holdings was groundless," without specifying the media to which it was referring.
The Financial Times reported yesterday that the agency was reviewing its euro-region debt holdings and that its representatives had met with foreign bankers in recent days to discuss the matter.
The Dow Jones Industrial Average closed yesterday below 10,000 for the first time since February after the report spurred concern the credit crisis in Europe may worsen.
Speculation that central banks may trim their accumulation of euros deepened after the currency shared by 16 European Union members tumbled as low as $1.2144 on May 19, capping a 24 percent slide from its July 2008 high. The currency traded at
$1.2304 as of 7:01 a.m. in New York.

Yuan Forwards

Non-deliverable yuan forwards fell to an eight-month low last week as investors pared expectations for the currency’s gains against the dollar. After strengthening today and yesterday, the contracts indicate the yuan will appreciate about
1.2 percent in the next year. China has held the currency at about 6.83 per dollar for 22 months.
China’s $300 billion sovereign wealth fund will maintain its investments in the euro area, CIC’s Gao said, according to the official Xinhua news agency, which cited a May 26 interview.
CIC, which manages a portion of the nation’s foreign currency reserves for the administration, will "closely watch"
the euro region’s short-term market volatility, Xinhua cited Gao as saying. The sovereign wealth fund’s concerns relate to the EU’s monetary and regulatory framework, Gao said at the OECD.
"In the longer term, we have to look very carefully at whether policy in the EU, currency issues and regulatory issues, will allow this continent to grow as it has in the past," he said during a panel discussion recorded and published on the OECD website. "That is my long-term worry. For the present time, we’re not" cutting our holdings, he said.
The fund is a financial investor and has no political goals, Xinhua cited Gao as saying. CIC will avoid investing in the gambling and tobacco industries and in industries that produce weapons of mass destruction, Gao was cited as saying.