China, Japan ‘to pledge conditional eurozone support’
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Emerging Markets

China, Japan ‘to pledge conditional eurozone support’

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Chinese and Japanese support for a eurozone bailout fund will come with strings attached and only once the fine print becomes clear, senior figures have suggested

China and Japan are willing to provide financial support to help resolve the eurozone debt crisis, but any support will come with strings attached and only once they receive precise details of the latest bailout plan, senior figures have suggested.

EFSF chief executive Klaus Regling returned from trips to Beijing and Tokyo last week with pledges of support for the eurozone’s attempts to resolve its debt crisis. This raised expectations that both Asian nations, which have vast foreign reserve holdings, would play a major role in a European bailout.

But neither country has announced the financial details of any contribution to a eurozone rescue package, raising doubts about the scale and significance of their likely role.

Yu Yongding, a former senior advisor to China’s central bank, does not believe that Chinese President Hu Jintao will pledge to play a lead role in a eurozone bailout package at the G20 Summit in Cannes this week. “The eurozone should not expect that a red knight will ride to its rescue,” Yu told Emerging Markets.

However, he stressed that China would nevertheless be willing to play some role, provided it was in their interests to do so. “China can definitely play a constructive role in helping eurozone countries overcome their difficulties,” he said. “Sitting on $3.2 trillion foreign exchange reserves, which consist of mainly dollar-denominated assets, China will be very happy to diversify its portfolio.”

Yu believes that China will likely press for guarantees on any financial support it pledges to the eurozone, adding that the onus was on European leaders to reassure the Chinese that their investments would be protected.

“Faced with borrowers who may default, safety becomes the key for investors,” he said. “There are plentiful ways for eurozone countries to provide China with iron-clad guarantees. If eurozone countries are really serious about borrowing from China, they should know how to give China confidence for its investment.

“But it is unwise for China to take the initiative to demand specific guarantees. Europeans should first put their cards on the table.”

Japan has bought 20% of debt issued by the EFSF to date. According to an advisor close to Yoshihiko Noda, the Japanese prime minister will tell eurozone leaders in Cannes that Japan is prepared to buy more EFSF debt, provided that Tokyo is satisfied with details of the agreement reached at the eurozone summit.

“It is important initially for Europe to take responsibility [for the eurozone crisis [but] we hope there will be an effective mechanism for the eurozone to receive money from outside [the zone],” Noriyuki Shikata, Noda’s personal press secretary told Emerging Markets.

“Japan will continue to play a constructive role toward achieving stablity of the region, including funds,” he said, adding that Japan expects to continue buying EFSF bonds but not necessarily to account for as large a proportion of the bonds held as previously.

A former senior Japanese finance ministry official also suggested that Japan will attempt to ward off any potential criticism of its latest foreign exchange market interventions in Cannes. Japan has intervened unilaterally on three occasions over the past year, and its latest intervention on October 31 is thought to have totalled between 7-10 trillion yen.

“Japan needs to convince its colleagues that its intervention is consistent with the tenor of the G20 communiques on market-determined exchange rates,” a former senior Japanese finance ministry official who has also served with the IMF, told Emerging Markets.

Japan is likely to plead special circumstances affecting the yen, however, and its commitment of continue support for a eurozone bailout gives it firmer ground to ask for Europe’s understanding on yen interventions, officials say.

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