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29th Mar 2024

See-sawing euro highlights Chinese influence

  • A picture of Mao Zedong on a 100 yuan note (Photo: DavidDennisPhotos.com)

The vagaries of modern-day currency trading and the huge influence of Chinese policy decisions were on full display on Thursday (27 May) as media speculation about Beijing's foreign reserve strategy caused the euro to see-saw.

The single currency shared by 16 European states dipped in overnight trading, apparently on the back of a Financial Times report suggesting China was increasingly concerned about its bond holdings from peripheral eurozone states.

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This led to market speculation that Beijing may be reconsidering its policy of diversifying part of its massive currency reserves out of the dollar.

But the euro then recovered during Thursday morning trading after China's State Administration of Foreign Exchange (Safe), which manages the $2,447 billion of foreign exchange reserves held by the country's central bank, issued a statement denying this was the case.

"China is a responsible and long-term investor in the investment of foreign exchange reserves and we will always follow the principle of diversification," it said in a statement. "Europe was, is and will remain one of the major investment markets for China's foreign exchange reserves."

The single currency was also buoyed by news that South Korea's central bank had also indicated it has no plans to cut its euro holdings. Korea is the sixth largest holder of foreign currency reserves.

Market concerns over the eurozone's fragility returned later in the day however, with news that Italy will now face a general strike at the end of June in protest against recently announced budget cuts causing the euro's rally to fade.

Rapidly changing fortunes

A European Commission report published last year to commemorate the 10th anniversary of the single currency was largely celebratory in tone, as central bankers around the world increasingly chose to include larger slices of the euro in their portfolios.

But after a decade of relatively calm waters, the currency has plunged roughly 14 percent versus the dollar this year on the back of market fears that Greece's debt crisis was in danger of spreading to the rest of the eurozone.

A perception that the region's politicians have been slow to react has exacerbated the problem, with squabbling between national capitals giving the impression of a European ship lost at sea and without a credible solution.

Investor sentiment subsequently rose on the back of a belated €110 billion Greek bail-out package and subsequent €750 billion equivalent for the wider eurozone, but the euphoria proved to be short-lived as markets questioned the ability of governments to implement the new packages.

Despite this however, analysts say there is very little evidence to suggest that China is moving reserves out of the euro, with Beijing still expected to push ahead with plans to gradually allow the renminbi to rise in value, a longtime European and US request.

"I wouldn't say the current behaviour is changing the Chinese position," said Sven Schubert, a currency analyst with Credit Suisse bank. "Chinese authorities are aware that the eurozone response was delayed for domestic political reasons. They are not disappointed."

"We still expect that there will be a re-evaluation of the renminbi, starting in the third quarter of this year, and rising by five percent over 12 months," he added.

Multi-lateral governance

China's increasingly important role in the global economy is one of the themes being addressed by European Parliament President Jerzy Buzek when he meets the country's leaders in Beijing this week.

On Thursday, Mr Buzek said Europe appreciated China's "steady commitment to macroeconomic stability and its recent development," but insisted that a multilateral approach to the global problems was needed.

"'One tree is not enough to build a temple': we need multilateral governance - we need China as a strong partner," said the Polish politician.

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