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.

This report has no basis in fact, said SAFE, the arm of the central bank that manages China's $2.4 trillion in foreign exchange reserves, the world's largest stockpile.

Roughly a quarter is estimated by analysts to be held in euro-denominated assets, primarily sovereign bonds. The euro has fallen more than 14 percent against the dollar this year, reflecting investor concerns over the euro area debt crisis.

A Chinese banker in Beijing, who has worked with the country's reserve managers, said they were nervous about Europe's outlook and were likely to exercise more caution about buying euros in the short term.

But Beijing has few other outlets for investing its vast cash holdings and was quick to squelch any suggestion that it was losing confidence in the euro, which would only undermine the value of its own reserves.

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 stabilize 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 toward 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.

Since China's reserves are expressed in dollar terms, when the price of the non-dollar portion falls, the overall value of the reserves declines.

SAFE said on May 14 that the strength of the U.S. dollar had reduced reserves by $48 billion in the first quarter.

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.

The Chinese banker who has worked with SAFE said that it regularly sought outside opinions about the global economy and there was nothing unusual about it setting up meetings to discuss the euro.

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.

FEW ALTERNATIVES

China has been accumulating foreign exchange reserves at a pace of about $30 billion per month this year.

Only Europe and the United States offer debt markets large enough and liquid enough to absorb that amount of cash, Stephen Green, an economist with Standard Chartered in Shanghai, said.

Last year the United States looked creaky. Now Europe looks creaky. As the world's biggest international creditor, China has a problem in a world where debtors are not looking so healthy, he said.

It would be hard for China to stop buying European assets, let alone start selling its holdings, when it has to invest such a volume of foreign exchange on a daily basis, Green said.

At the margin, I think is it plausible that they buy less euro and more dollar assets, he added.

China has gone to lengths in the past day to assure global markets that it still has confidence in the euro.

The country's $300 billion sovereign wealth fund will not cut its investments in Europe despite the fall in the euro, Gao Xiqing, chairman of China Investment Corp, said on Wednesday in Paris.

For a while, we were debating whether to underweight Europe, but our conclusion probably is not to underweight it, he said.

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

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