Don't count on China to rescue Europe: ex-lawmaker

Sat Nov 5, 2011 11:12am EDT
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BEIJING (Reuters) - China is willing to help Europe -- its largest export market -- to deal with its debt crisis and get back on a recovery path, but there are limits to what it can actually deliver, Cheng Siwei, a former top Chinese lawmaker, said on Saturday.

"China certainly hopes the debt crisis could be resolved. If the crisis spreads, it could lead to a break-up of the euro zone and affect the global monetary system as the euro is the second-largest reserve currency," Cheng told reporters.

"But don't pin high hopes on China. China cannot be a hero to the rescue," said Cheng, who remains an influential adviser to the government. "China will lend a helping hand within its capacity but Europe must rely on itself."

Although China has a war chest of $3.2 trillion in foreign exchange reserves, the world's largest, the amount of free cash it could invest in Europe could be limited, Cheng said.

For example, China cannot easily dump its holdings of U.S. Treasuries of around $1.14 trillion, because such a step could send U.S. bonds prices tumbling, he said.

"If we sell U.S. bonds, the U.S. economy could be in trouble," he said.

Cheng, previously a vice chairman of parliament with a rank equivalent to a vice premier, rattled financial markets in 2006 when he said China should trim its holdings of U.S. debt.

Analysts believe at least 70 percent of China's foreign currency reserves have been channeled into dollar-denominated assets, including Treasuries, and a quarter into euro assets.

Buying European bonds would be one of the available options for China to help Europe, Cheng said, adding that China could boost trade with the region and spur direct investment.   Continued...

<p>Chinese one yuan coins are placed on 100 yuan banknotes in this illustrative photograph taken in Beijing February 8, 2011. REUTERS/Petar Kujundzic</p>