The euro and European capital markets rallied after China made the announcement.

The Financial Times, citing unidentified banking sources, reported on Wednesday that officials at SAFE had met with bankers in recent days on reviewing its holding of eurozone debt following concerns over the sovereign debt crisis in Europe.

"This report is groundless," SAFE, which manages China's more than $2.4 trillion of foreign exchange reserves, said in a statement.

"China is a responsible long-term investor and has always firmly supported the European Union (EU) integration process," the statement said, adding that the nation supports the package of financial stabilization measures taken by the EU and the International Monetary Fund.

"We believe that with the joint effort of the international community, the eurozone will be able to overcome its difficulties and maintain the steady and healthy development of European financial markets," the foreign exchange regulator said.

Gao Xiqing, president of China Investment Corp, said on Wednesday that the volatility in the eurozone markets has not made the sovereign wealth fund restructure its European portfolio, as it is a long-term investor.

Zuo Xiaolei, chief economist of China Galaxy Securities, said even if China reviews its European investment, it is normal. "China needs to evaluate the risk of its investment in Europe as it owns huge foreign exchange reserves, but evaluation doesn't necessarily mean reduced holdings."

With the global financial markets still facing many uncertainties despite signals of economic recovery, especially as the eurozone risks being trapped in a sovereign debt crisis, a review of the investment in the continent "can provide us a clear picture of the real risks", she said.

Sun Lijian, a professor at the China Center for Economic Study at Fudan University, said that reducing the euro debt is not a good option. "Reducing eurozone debt means China would have to increase dollar holdings; however, the performance of the US dollar may be even worse in the long run."

The current European crisis, which was triggered by the Greek debt crisis, will not last long, Sun said. "China needs to hold eurozone debt in order to continue to push reform of the foreign exchange rate system and diversify its forex reserves."

European stocks, Asian shares and US index futures surged after SAFE's clarification. The euro rebounded from near four-year lows against the dollar and European shares rose on Thursday on China's denial of a report that it is reviewing its investment in eurozone debt.

China Daily

(China Daily 05/28/2010 page13)