Europe must fix itself before Chinese aid: CIC

MOSCOW Tue Oct 2, 2012 12:43pm EDT

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MOSCOW (Reuters) - Chinese investors will not buy into bonds issued by debt-ridden euro zone countries until their fundamental problems are solved, a senior official with China's $480 billion sovereign wealth fund said on Tuesday.

Jin Liqun, chairman of the supervisory board of the China Investment Corporation (CIC), said it is unlikely that the debt problems bedevilling euro zone countries will be solved until Europe is in super-critical situation.

"There will be no solution, until there is no way out," Jin told Reuters in an interview.

Jin said China backs the European Central Bank's plans for unlimited bond purchases to aid debt-strapped euro zone states, but stated that in itself this would not be enough and the time it bought should be devoted to crucial reforms,

"The ECB is going in the right direction, with the support, most importantly of the Germans, which is crucial," Jin, a former finance vice-minister, said on the sidelines of the VTB Capital investment conference in Moscow.

"But whether this is a momentary solution or a permanent solution - it does not depend on the ECB policy in and of itself."

Urgent reforms in the "peripheral" countries of the euro zone, which are shouldering the heaviest debt burden, must take place.

"We have monetary policy hijacked by fiscal policy, which in turn is hijacked by the social programs - unless you solve the fundamental problems, this kind of ECB policy will not work forever."

NO INVESTMENT WITHOUT REFORMS

The mass demonstrations in Greece and in Spain against fiscal tightening do not bode well for attracting investment into their debt, Jin said.

"European countries, the people in Greece, in Spain, will need discipline. They should understand this is their only way out of their debt problems," he said.

"It's not realistic to expect any Chinese investor, CIC included, to buy the bonds, which are not safe."

China, which sits on more than $3.2 trillion in gold and foreign exchange reserves, could put some of that money to work in Europe if a proposed common Eurobond backed by the euro zone's stronger members is created.

"If the euro zone would issue a Eurobond backed by all of the countries - it is more attractive to international investors," Jin said, adding: "Backed by all of the countries means backed by the core members."

Top European officials, however, said in a June report that euro bonds could be issued at the final stage of a fiscal union which could take years to construct.

QUANTITATIVE NIGHTMARE

The health of the Chinese economy, which is expected to grow by 7.5 percent this year and which holds some $1.2 trillion in U.S. Treasuries, depends on how the U.S. economy performs, Jin said.

"We would be very much sensitive to reducing the value of our holdings," he told forum participants.

Jin said that without the U.S. Fed's new quantitative easing program the country's economy would continue to weaken. But implementation of the program is key.

"If QE3 can sustain the economy and create jobs, the U.S. economy would be continuing to grow - this would be certainly fine. But the nightmare is U.S. QE3 would lead to QE-infinity," Jin said.

"Then that would be a huge problem for all of the rest of the global economies. I hope that QE3 can do the job as expected. Otherwise it would be seemingly a prelude to QE-infinity."

The United States has to deal with reduction of its budget deficit, which Jin told Reuters is do-able within five to 10 years.

"There should be bipartisan support to solve the fiscal cliff issue," Jin said.

"Let's see what will happen after the presidential campaign."

(Additional reporting by Katya Golubkova; Editing by Douglas Busvine and Stephen Nisbet)

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