China to Buy Europe Bailout Bond

Asian investors including the Chinese government are expected to represent a “strong proportion” of the buyers of Portuguese bail-out bonds when the eurozone’s €440 billion rescue fund begins auctioning them next month, according to senior fund officials.

Davis McCardle | The Image Bank | Getty Images

Klaus Regling, chief executive of the European Financial Stability Facility, told reporters on Wednesday that Beijing was “clearly interested” in the Portuguese auctions and that he expected China to participate.

He argued the intense interest from Asia and other international investors showed renewed confidence in the future of the euro as a currency.

But Mr Regling acknowledged that the primary motivation of Asian investors was to find new, safe investments into which to put their growing cash piles, rather than any endorsement of how Europe has handled the debt crisis in some eurozone countries.

“[Asia] is a region that has money to invest in the rest of the world,” Mr Regling said. “They don’t want to go only into one currency. They don’t want to go only into one asset class .?.?. They look at us and come to the conclusion it’s a good way to diversify.”

Chinese officials have expressed interest in investing in European assets as a way to diversify holdings in their sovereign wealth and other investment funds, which have historically concentrated on dollar-based assets. While Beijing has acknowledged it remains a significant holder in Portuguese and Greek sovereign bonds, Chinese officials have been reluctant to disclose where in Europe it will make investments.

Christophe Frankel, EFSF chief financial officer, confirmed that China had participated in its January auction, which raised cash for Ireland’s bail-out, but declined to disclose how much Beijing had invested.

China’s involvement in the triple A rated bonds issued by the bail-out fund could be an indication Beijing is focusing on ultra-safe assets rather than more risky sovereign bonds for countries such as Ireland, Portugal and Greece.

European Union leaders have voiced hope that Chinese purchases of such sovereign bonds could help reverse market sentiment against Europe’s “periphery”.

Mr Regling spoke ahead of what is expected to become the busiest month yet for the bail-out fund, set up last year in the wake of Greece’s debt implosion.

It will hold its first auction to raise funds for the recently approved €78 billion Portuguese bail-out in mid-June, a €3 billion to €5 billion offering that will auction the fund’s first 10-year bonds.

The EFSF is expected to hold a second auction for Portugal by the end of the month, which will also raise up to €5 billion. The second auction will be for bonds of five-year maturities.

The move, coming soon after the bail-out was approved by EU finance ministers last week, reflects Lisbon’s urgent need for cash, with nearly €10 billion in debts coming due by the middle of next month.

Mr Regling said there would be no further auctions of bonds for Ireland until after this summer, at the earliest, reflecting the negotiations over the interest rates for Ireland’s bail-out loans and delays in Dublin’s recapitalisation of its debt-burdened banks.