Colin Barr

Following the money in banking, economics, and Washington

China bucks up the euro

May 27, 2010: 10:00 AM ET

The Chinese aren't fleeing the euro, the government's foreign exchange office said.

The Financial Times reported Wednesday that Chinese officials were reviewing their holdings of euro zone debt in meetings with bankers. The report suggested another source of selling pressure on the free falling euro and sent shudders through markets Wednesday afternoon.

Eye of the storm?

But on Thursday, China's State Administration of Foreign Exchange posted a statement contending that reports the government is evaluating its euro holdings are "groundless."

The comments sent the euro higher against the dollar. It traded at $1.23 Thursday morning, up a penny from Wednesday's close.

The statement, attributed to SAFE chief Yi Gang, continued, "China has always firmly supported the EU integration process. We support the European Union and the International Monetary Fund package of financial stability measures being taken."

China holds $2.45 trillion of foreign exchange reserves and for years has run a huge trade surplus with the United States, its top trading partner, and Europe. Those flows give the foreign exchange office ample funds to invest, and China is a big holder of both U.S. Treasury debt and euro zone government bonds.

Fears that China would send the dollar tumbling by pulling back from Treasury purchases have loomed over the U.S. economic outlook for years, though many observers say those fears are overstated.

China's comments Thursday are intended to quell similar concerns across the Atlantic, as Europe struggles to deal with a sovereign debt crisis that has forced governments to cut spending at a time of high unemployment.

The government statement said the Chinese act as "responsible long-term investors, and always adhere to the principle of decentralized investment" -- meaning they seek to avoid risky concentrations in any one currency.

But at a time when there are big questions about all the major currencies, carrying out that principle is clearly easier said than done.

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About This Author
Colin Barr
Colin Barr
Senior Writer, Fortune

Colin Barr has covered finance for Fortune.com since November 2007. Previously he was a writer and editor for TheStreet.com, winning a 2006 Society of American Business Editors and Writers award for "The Five Dumbest Things on Wall Street," and for Dow Jones Newswires. He is a 1991 graduate of Penn State and lives in Port Washington, N.Y., with his wife Meena Bose and their two kids.

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