China Shouldn’t Rescue Greece by Buying Debt, Yu Says (Update2)

Greece has a lower debt rating than the U.S. and its statistics have been “sharply” criticized by the European Commission, said Yu, currently a member of the Chinese Academy of Social Sciences, a government-backed research body. The Greek Finance Ministry yesterday “categorically“ denied a report in the Financial Times that it is wooing China to buy as much as 25 billion euros ($35 billion) of its bonds.

“It is unreasonable for an economist to support a diversification away from an unsafe asset class to a much more unsafe asset class,” Yu said in an e-mailed response to questions. “Let European governments and the European Central Bank rescue Greece.”

China wants to improve management of its $2.4 trillion foreign-currency reserves by both seeking safety and increasing the value of its holdings, the State Administration of Foreign Exchange said on Jan. 6. Chinese investors cut their holdings of U.S. Treasuries by $9.3 billion in November to $789.6 billion, Treasury Department data show.

Yu’s views have received official backing before. In February, he called for China to seek guarantees that its investments in Treasuries won’t be eroded by “reckless policies.” A month later, Premier Wen Jiabao did just that during an annual session of parliament. Yu was picked by the China Daily to grill U.S. Treasury Secretary Timothy Geithner in Beijing in June on risks of the record U.S. fiscal deficit.

Greek Fund Raising

Greece is seeking to raise 53 billion euros in funds this year to reduce a budget deficit of almost 13 percent of gross domestic product, the biggest shortfall in the European Union. The Finance Ministry plans to reduce it to 3 percent of GDP by 2012. The government sold 8 billion euros of five-year bonds with a coupon of 6.1 percent this week. Greek 2015 notes fell today, sending the yield up seven basis points to 6.60 percent.

Finance Minister George Papaconstantinou said on Jan. 20 that the government is considering bond issues in Asia and the U.S. and may market debt to Greek retail investors. The country is rated A2 by Moody’s, the fifth-lowest investment-grade, and two steps lower at BBB+ by S&P. The U.S. has the highest rating from Moody’s and S&P.

An official in SAFE’s press department who asked not to be named yesterday said he hadn’t heard about the plan for China to buy Greek debt and declined to comment.

Credibility Concern

“Even if pricing is attractive, one key problem for Greek government bonds is the lack of credibility,” Yu said. “We trust U.S. statistics on debt and deficits. The numbers are not pretty but we have a pretty good idea, so we would know what we are buying. In contrast, Greece’s statistics have been sharply criticized by the European Commission.”

China Investment Corp., the nation’s $300 billion sovereign wealth fund, posted a 2.1 percent loss in 2008 as slumping shares eroded the value of its $5.6 billion investment in Morgan Stanley and its $3 billion stake in Blackstone Group LP, manager of the world’s biggest buyout fund, both acquired during its first year in 2007.

The Beijing-based fund may have had a return of more than 10 percent in 2009, said London-based Jan Randolph, director of sovereign risk, analysis and forecasting at IHS Global Insight. Initial investment “mistakes” ensured CIC kept most of its assets in cash during 2008, allowing managers to buy into “rising asset markets of their strategic choice” last year, he said.

Safety First

CIC pumped about $10 billion into commodity-related companies in the second half of 2009, according to data compiled by Bloomberg. The fund has had “early” talks for direct investments in Brazil, the world’s second-biggest iron-ore exporter, and Mexico, the No. 2 silver producer, Chairman Lou Jiwei said at the Asian Financial Forum in Hong Kong on Jan. 20.

“China should avoid government bonds that offer high interest rates like that of Greece’s, as safety should be the first concern,” said Lu Ting, a Hong Kong-based economist with Bank of America-Merrill Lynch. China should favor debt of countries with a better economic situation such as Germany and leave bailouts to the International Monetary Fund, he said.

—Belinda Cao, Natalie Weeks, Zhang Dingmin. Editors: Sandy Hendry, James Regan

02-10-2010 22-34