China says Europe key market

BEIJING (Reuters) - Europe remains a key investment market for China's foreign exchange reserves, the Chinese central bank said on Thursday, helping to soothe markets unnerved by a report that it was reviewing its euro-zone bond holdings.

The Financial Times said on Wednesday that China's State Administration of Foreign Exchange (SAFE) was meeting foreign bankers because of concerns about its exposure to debt troubles in Europe.

That report was groundless, said SAFE, the arm of the central bank that manages China's $2.4 trillion (1.7 trillion pounds) in foreign exchange reserves, the world's largest stockpile.

"China is a responsible and long-term investor in the investment of foreign exchange reserves and we always follow the principle of diversification," it said in a statement on the central bank's website (www.pbc.gov.cn)

"Europe was, is and will remain one of the major investment markets for China's foreign exchange reserves," it said.

It also said that China was confident that the euro zone would be able to overcome its difficulties, adding that Beijing supported the actions taken by the International Monetary Fund and the European Union to stabilise financial markets.

DIVERSIFICATION

Earlier on Thursday, a government official familiar with China's reserve management said the country remained committed to its long-standing goal of diversifying its foreign exchange reserves.

The euro, which had fallen towards a four-year low on Wednesday, jumped to a day's high, after the official said that the direction of diversification "will not change."

U.S. stock futures also extended gains.

Over the past few years, when China has mentioned diversification, it has often been interpreted as referring to its objective of reducing exposure to the dollar by lifting investments in other currencies, such as the euro.

Analysts say that China has been shifting some of its reserves into a wider range of currencies in recent months, including assets elsewhere in Asia and in commodity-producing countries.

Separately, a banker who has worked with China's reserve managers said they would exercise more caution about buying the euro in the short term, but that they had few other outlets for investing their stockpile of cash.

He said that SAFE regularly sought outside opinions about the global economy and that there was nothing unusual about its setting up meetings to discuss the euro's prospects.

"Marginally, I think they are concerned about what is happening in Europe and they want to reduce their risk," he said. "What is happening in Europe is very uncertain and that is what they want to avoid. At the end of the day, these guys are bureaucrats."

(Additional reporting by Victoria Bi in Shanghai; Editing by Ken Wills and Neil Fullick)