China to buy Portuguese debt next year, may save euro zone once again

China will buy 4 to 5 billion euros of Portuguese debt in first quarter 2011, reported the Jornal de Negocios, a Portuguese newspaper. This represents about a third of Portugal's refinancing needs by April of next year.

China's purchase is expected to relieve the intense financial pressure of the Portuguese government, said the paper.

Yesterday, Chinese Vice Premier Wang Qishan said he supports the European Union (EU) and International Monetary Fund's (IMF) efforts to stabilize the euro zone. He hopes these efforts will produce results and lead to recovery.

Wang made the comments at the E.U.-China High Level Economic and Trade Dialogue.

China's continued vote of confidence for the EU may save Europe once again.

Back in July, when Europe sovereign debt pressures were intense, Chinese Premier Wen Jiabao said Europe remains a key investment destination for China's $2.6-trillion foreign exchange reserves.

This helped stabilized the situation because investors were assured that one of the largest players in the market is still buying. Billionaire investor George Soros actually credits China with saving the euro.

Now, China may rescue Europe once again because Portugal is eyed as the next domino to fall in the ongoing sovereign debt crisis. Protecting Portugal is vitally important because if it were to fall, Spain -- the fourth largest economy in the euro zone, having heavy exposure to Portugal, and the real worry of policy makers -- may very well follow.

While the current EU bailout mechanism has enough money to rescue small countries like Portugal or Greece, it will probably not be enough for Spain. A Spanish sovereign debt crisis, therefore, will be disastrous for the EU.

Email Hao Li at hao.li@ibtimes.com