Official Chinese View on the Euro

["Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>]

Euro's Impact on China Profound

Xinhuanet 2002-01-04 13:56:11
Beijing, January 4 (Xinhuanet) -- While the long-awaited debut of euro
banknotes and coins on Tuesday was largely considered a technical step
and of limited macroeconomic significance, it signals the coming of age
of a currency that is destined to revise the world monetary landscape.

While the public discuss the pros and cons of the delicate design of the
new banknotes and coins, economists are doing more serious thinking
about what the currency, backed by 12 national economies accounting for
16 per cent of the world's gross domestic product, will mean for China.

"The creation of the euro will have a significant and profound impact on
the economic growth in China," Friday-published China Daily qouted a
senior researcher with the Institute of International Finance under the
Bank of China as saying.

Despite its current sluggishness against the US dollar, the euro, a
monetary peg in 55 countries outside the euro zone, has substantial
financial implications for China's foreign exchange reserves, foreign
debt, monetary policy as well as the banking sector, the paper said.

The euro provides a fresh option for China's central bankers to
diversify its foreign exchange reserves, which hit US$200 billion in
mid-October.

China's current holdings in European currencies are enough to meet
emergency payment needs, but analysts mostly favour increasing euro
reserves for its safety and a unified European financial market,
according to the daily's report.

While the once unchallengable US dollar comes increasingly under doubt
for its strength after the world's No 1 economy slackened its pace in
late 2000, the euro has won the favour of many economists, for its
long-term strength at least.

The senior researcher said the introduction of the euro means a new
choice in China's foreign exchange reserves, a stable euro will
reinforce the safety of euro assets, and the unification of the euro
zone financial markets means much higher liquidity for such assets.

Uncertainties stemming from the much different development levels of
euro zone economies have dogged the strength of the single currency,
driving its exchange rate to a historic low of US$0.8225 in 2000 from
the historic high of US$1.19, the paper said.

However, "the fundamental trend is the euro growing stronger," the paper
qouted deputy secretary general of the China Association for
Macroeconomics as saying.

The euro zone's significance in world trade, the reduction of
risk-driven swap operations between European currencies, as well as the
financial market unification, will greatly increase demand for the euro,
backing its long-term strength.    China's central bankers have already
voiced their confidence in the currency and  said earlier the central
bank had been building up its euro holdings.

However,analysts say the maturities of the euro portfolio should be
diversified to avoid losses from fluctuations in its exchange rate.

The introduction of the euro also provides stages for China to
restructure its foreign debt by borrowing more euro-denominated debt and
cutting back on its yen liabilities.

Many expect that the creation of the euro will dilute the overwhelming
influence of the US dollar and Japanese yen on the world monetary
market. The strength of the dollar and yen are in doubt as both
economies are doing badly.

Thus, the pressure on the renminbi could be recuced from the
fluctuations of the US dollar and Japanese yen, which will be a
long-term stabilizing factor for the renminbi, the senior researcher
said.

The currency unification will give a push to European banks in the
direction of the universal banking model, typical in Germany, making
them more competitive and consequently putting more pressure on Chinese
banks, analysts say.

European banks have already enjoyed a cozy position in the world banking
system, taking up more than 300 seats in the list of the world's top
1,000 banks.

The monetary unification has already taken a considerable chunk of
profits away from Chinese banks, as conversions between the 12 legacy
currencies are no longer needed, the paper said.

Experts recommended that Chinese banks should put more stress on
Frankfurt, where the European Central Bank is headquartered, in their
overseas business strategies, alongside their long-time emphasis on
London.     Enditem