China, EU reassure on subprime fallout

By Mike Peacock

LONDON (Reuters) - China said on Monday none of its massive foreign exchange stockpile was invested in the teetering U.S. subprime mortgage sector, while a top EU official predicted the crisis could crimp but not choke off economic recovery.

European Union Economic and Monetary Affairs Commissioner Joaquin Almunia said tighter credit conditions were possible and that growth in the euro zone may suffer a little as a result.

"I think downside risks have risen for next year ... and, probably, all this turbulence will cut European growth by a few (tenths of) points," Almunia said.

A senior Chinese foreign exchange agency official helped sentiment by saying none of Beijing's $1.33 trillion stash of foreign exchange reserves -- the world's largest -- was in U.S. subprime mortgage-backed securities, underscoring China's earlier assertions that it had only limited exposure.

"We have no holdings of U.S. subprime securities," Wei Benhua, deputy head of the State Administration of Foreign Exchange, told reporters on the sidelines of a forum.

China's towering forex reserves and current account surplus are now a key cog in the global economic wheel. Any damage there would inflame fears that the U.S. mortgage crisis could threaten wider economic tumult.

Analysts say China's capital controls have helped insulate it from the liquidity crunch, sparked by mass defaults on U.S. home loans stemming from aggressive lending mainly to poor people who have been squeezed as interest rates climbed.

European shares rose for a fourth consecutive session as hopes of a near-term U.S. rate cut firmed after Federal Reserve Chairman Ben Bernanke said last week he would take any steps needed to shelter the economy from a global credit squeeze.

But Germany's IKB (IKBG.DE), the first European victim of the credit turmoil, gave a reminder the crisis had not blown out, saying it expected to lose nearly $1 billion this year.

The lender to German companies said it was striving to stabilize future revenues but they would be "significantly lower" than in previous years, after its subprime mortgage investments turned sour, prompting a 3.5 billion euro rescue by other German banks.

The chief executive of Deutsche Bank (DBKGn.DE), Germany's biggest bank, said global economic growth would take a hit.

"Growth, especially of private consumption in the United States, will suffer because of the housing crisis and that can naturally not go without negatively affecting the world economy overall," Josef Ackermann said in a guest column published in the German business daily Handelsblatt on Monday.

ECB ON HOLD, FED TO CUT?

The European Central Bank is no longer expected to raise rates when it meets on Thursday, because of the market turmoil.

A Reuters poll last week showed 62 of 82 economists expect euro zone rates on hold at 4 percent. Economists put the chance of a hike at 40 percent, compared with 75 percent two weeks ago.