BEIJING—The euro's plunge on Europe's sovereign-debt crisis won't deter China from diversifying its massive foreign-exchange reserves, an adviser to China's central bank said Tuesday.
"Diversification is a long-term trend," Xia Bin, an adviser to the People's Bank of China, said in a telephone interview.
The euro rose on the comments, which ran counter to global speculation that the common currency's slide might prompt China to sell off euros. Later in the day, the euro fell to a fresh four-year low against the dollar, after Germany announced it would ban certain speculative investments. The euro dropping nearly 1.7% against the U.S. currency.
The composition of China's foreign-exchange reserves, which at about $2.5 trillion are by far the world's largest, is a closely guarded secret. Analysts believe the vast majority of China's holdings are in dollars, and Chinese officials have made clear that the dollar will remain dominant.
However, officials have expressed mounting concern about the U.S. currency in recent years because of Washington's growing deficits, and have said that China wants to diversify its holdings, which analysts widely interpret to mean putting more money into euros, the second-most liquid currency after the dollar.
Central banks, especially the cautious PBOC, take the long view on their asset allocations and are unlikely to shift suddenly. If anything, China could see the euro's drop as a buying opportunity.
"I don't think China will sell euros at the moment because if they sell, they'll be registering huge losses," said Li-gang Liu, head of China economics at ANZ Bank.
"I'd think this is a very good entry point for the exchange reserves to diversify from current U.S. dollar-heavy assets to more balanced asset classes by including more euro assets," Mr. Liu added.
The euro, which traded over $1.50 as recently as December, has sinceplummeted nearly 20%as the Greek fiscal crisis has broadened into a crisis of confidence over European sovereign debt and the stability of the common currency itself. It fell Monday to $1.2234 before bouncing back. It traded Tuesday at $1.2438.
The remarks by Mr. Xia, one of three academics on the central bank's monetary-policy committee, "were positive for the euro because they suggest the PBOC isn't in a rush to dump its holdings in the currency," said Yuichiro Harada, a senior currency dealer at Mizuho Corporate Bank in Tokyo.
To be sure, Europe's problems have caused concern in China's leadership. "The recent European sovereign-debt crisis has encumbered the European economy's recovery. The severity and complexity of the global financial crisis have surpassed people's expectations," Premier Wen Jiabao said Tuesday in a meeting with visiting German President Horst Köhler. "The international community, especially the main economies, must clearly recognize the situation, remain resolutely confident, and join hands to cooperate" in dealing with it, he said.
An investment officer at China Investment Corp., the country's $300 billion sovereign-wealth fund, said the recent €750 billion ($925 billion) rescue package led by the EU and the International Monetary Fund has blunted the crisis.
"Governments have responded to Europe's problems, and it is mainly a confidence issue now," the official said Tuesday. The CIC's news department declined to comment.
There are also broader political and economic reasons for China not to reduce its euro holdings.
Selling euro assets now could easily be construed as adding to Europe's financial woes and would push the currency down further, potentially fueling anger at Beijing. And a weaker euro undermines China's export competitiveness in Europe, China's biggest export market, HSBC currency strategist Richard Yetsenga said.
In addition, China is accustomed to fluctuations in currency values having a large effect on its reserves. On Friday, the State Administration of Foreign Exchange published data that showed that swings in the value of currencies and the prices of securities shaved $48 billion off the first quarter's net $95.9 billion increase in its reserves.
If the euro appears to be a questionable bet over time, China may take a long look at other assets such as oil, gold and copper.
That carries risks as well, because markets for those assets are relatively small and entering them for currency-management purposes could drive up China's import costs, said Royal Bank of Scotland strategist Ben Simpfendorfer.
Mr. Xia, the PBOC adviser, said China will look to increase its holdings in gold over the long run. China's gold reserves, at around 1,054 metric tons, still represent only a small part of its foreign-exchange reserves.
"For the renminbi to become a convertible currency, other than credible policies you also need credible gold backing," ANZ Bank's Mr. Liu said, referring to the Chinese currency. "I think that's a motivation the PBOC will definitely look into."
