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Source: Reuters

INTERVIEW-China to buy more Latin American bonds-researcher

Published: 30 Mar 2009 00:31:42 PST

* China to buy more Latin American government bonds

* Beijing likely to support extra capital for IADB

* Yuan may be used to settle more Sino-Latin trade

BEIJING, March 30 - China is likely to buy more Latin American bonds to support increased public spending in the region to combat the global financial crisis, a government researcher told Reuters.

Beijing will also probably buy bonds issued by the Inter-American Development Bank (IADB), Huang Zhilong from the Institute of Latin America, a think-tank that is part of the Chinese Academy of Social Sciences, said in an interview.

"China has promised to buy bonds issued by the International Monetary Fund; and China is very likely to buy any bonds issued by the IADB," Huang said.

Zhou Xiaochuan, governor of the People's Bank of China, said over the weekend that China, the IADB's newest member, would support the multilateral lender's capital expansion plans.

"If the IDB issues some kind of financing instrument like a bond or note, we can consider supporting it," Zhou told reporters during the bank's annual meeting in Medellin, Colombia. [ID:nN29307728]

The bank, one of the region's top lenders, is considering hiking its capital by up to $280 billion from $101 billion.

Across Latin America, governments are cutting budgets and seeking financing to ward off the squeeze from sliding raw material prices and dwindling exports. Huang said China would support Latin governments' efforts to boost economic growth.

"They have to issue more government debt to weather the crisis," he said. "And China will buy these sovereign and public bonds in the coming two or three years."

Buying more Latin American bonds would fit into Beijing's stated strategy of diversifying its $2 trillion foreign exchange reserve portfolio and forging closer political ties with countries that are big exporters of commodities to China.

"But Latin American bonds are known for their high risk, so the actual purchase volume wouldn't be huge. China's foreign exchange authorities will be very cautious," Huang said.

China's trade with Latin America ballooned to $140 billion in 2008 from $15 billion in 2001, turning China into the region's largest trading partner after the United States.

To help sustain the flow of goods despite a dearth of trade finance, Zhou signed a 70 billion yuan currency swap with Argentina on Sunday so Buenos Aires can pay for Chinese imports in yuan instead of hard-to-come-by dollars. [ID:nPEK111298]

It is China's first bilateral currency swap with Latin America, but Huang said the yuan may come to be used more widely to settle trade with the region; China's oil imports from Venezuela, for example, could theoretically be settled in yuan.

But Huang said China's financial presence and influence in Latin America was still in infancy.

"For instance, despite all the talk about the IADB, China only has a 0.004 percent stake in the organisation," he noted.

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