China must beware euro bond risks -ex-c.bank adviser-INTERVIEW

Trade the News

Wednesday January 12, 2011 09:52:07 PM GMT

* European stability fund-backed bonds are safer -Yu

* Says China must ensure safety, return on its investments

* Yu is confident in euro, bearish on dollar

By Kevin Yao

BEIJING, Jan 11 (Reuters) - China has shown support for the euro by promising to buy bonds from debt-ridden European countries, but it needs to be wary of investment risks, a former adviser to the central bank said on Tuesday.

It will be safer for China to buy bonds issued by the European Financial Stability Facility rather than from individual countries, Yu Yongding, an influential economist in the Chinese Academy of Social Sciences, a government think tank, told Reuters.

"On the one hand, we want to provide support. On the other hand, we need to consider the safety of our assets," said Yu, a member of the central bank's monetary policy committee until 2006.

"In principle, we support the euro, but we also need to ensure that our investment is safe and generates returns," he said.

"Whether we should buy the European stability fund or national debt is different. I think it's much safer if we buy the fund as it has a triple-A rating," he added.

The European Financial Stability Facility is a 440 billion euro ($570 billion) fund that helps heavily indebted euro zone nations. It can raise funds on international markets at competitive rates because it enjoys a top credit rating. There are strict conditions for countries receiving aid from it.

So far, China has publicly promised to buy government debt from Greece and Spain, but has abstained from giving details about the size of its investment commitments.

Spanish daily El Pais said on Thursday that China was ready to buy about 6 billion euros of Spanish debt, citing government sources. Neither the Chinese nor Spanish governments have confirmed the report. [ID:nLDE7050FZ]

DOLLAR BEAR

Yu, who has long seen the euro as an attractive alternative to the dollar for its foreign reserves, again voiced his optimism about the troubled single currency and reiterated his bearish view of the dollar.

"I have confidence in the euro. Europe's economy is not that bad. German's economy is in very good shape and France's economy is doing okay," Yu said.

"The dollar will definitely weaken over the long term. There shouldn't be any doubt about that," he added, noting that the dollar had fallen more than 90 percent in broad-based terms since the 1920s.

Loose fiscal and monetary policies adopted to spur the flagging U.S. economy would undermine the dollar, he said.

Yu also maintained his view that China needs to further diversify its huge currency reserves to reduce the dominance of U.S. Treasuries in its holdings of foreign assets.

China's foreign exchange reserves, the world's largest, rose by a record $199 billion in the fourth quarter to $2.847 trillion, the People's Bank of China said on Tuesday. [ID:nTOE70800T] ($1=.7722 Euro) (Reporting by Kevin Yao; Editing by Simon Rabinovitch)

(c) Copyright Thomson Reuters 2011. Click For Restrictions. http://about.reuters.com/fulllegal.asp