Show of Confidence in Europe

China is confident that Europe will overcome its problems and will continue to invest part of its foreign exchange reserves in European bonds, a senior central bank official said on Monday.

"We believe that Europe will ultimately overcome the debt crisis through their own efforts as well as with help from the international community," said Yi Gang, vice-governor of the People's Bank of China (PBOC), and head of the State Administration of Foreign Exchange.

"And China will continue to be a 'long-term and responsible' investor in Europe."

Yi was speaking in response to a question on China's holdings of euro assets, including Greek bonds, at a news conference during the annual parliamentary session.

China will continue to diversify its investments in foreign bonds, while keeping risk control a top priority, Yi said. The PBOC under its governor, Zhou Xiaochuan, has been following a prudent policy.

Concerns over safety, liquidity and potential revenues are three major factors affecting government's thinking when it tries to diversify the foreign reserves portfolio, he added.

"Under such principles, we will continue our investment in Europe."

The country's eurozone bonds did not register a loss.

"Instead, the revenue increase was higher than the local inflation rate despite the uncertainties of the debt crisis and economic recovery across the region, which proves diversification worked well."

China had $3.18 trillion of foreign reserves by the end of last year, the largest in the world. About one-third was invested in US Treasury securities, and about 20 percent has been invested in euro-denominated assets.

The PBOC said in a statement on Monday that it will make continued efforts in 2012 to manage the country's reserve assets with "new ideas" and in a more "effective" manner.

Nicola Casarini, research fellow at the EU Institute for Security Studies, said it means that China will further diversify away from the US dollar and invest in euro-denominated assets.

"This trend has accelerated in recent months - Zhou (PBOC governor) is giving a policy framework to what the PBOC has been doing recently. China seems to put more trust in the resilience of the European economy than in the US," Casarini said.

However, Yi's remarks indicated that China would rather invest in industrial and strategic assets in Europe rather than buying more bonds, he said.

"For China, this is also a way to help Europe at this historic juncture. Moreover, this approach allows Chinese leaders to avoid internal criticism of bailing out rich Europe."

Casarini agreed with Yi that the eurozone crisis is now showing signs of improvement, spurred by the second installment of cheap liquidity by the European Central Bank and the policy of austerity implemented by the new Italian government.

In addition, the systemic risks of the eurozone declined as the Greek finance ministry announced it had received sufficient participation from private-sector creditors on Friday to proceed with its proposed bond exchange program, said Wang Tao, head of China economic research at UBS Securities Co Ltd.