Ambrose Evans-Pritchard

THE Chinese government gave the euro its much-coveted seal of approval yesterday, announcing that it would switch part of its vast dollar reserves into the world's emerging "reserve currency".

Chinese finance minister Xiang Huaicheng said the flawless launch of notes and coins had swept away the lingering doubts about monetary union and opened the way for a recovery on the exchange markets.

"I will instruct the responsible authorities that they should not just have a currency basket but rather that they should buy euros as quickly as possible," he said after a meeting in Shanghai with the German finance minister, Hans Eichel.

"It is an inevitable tendency that the euro will become a reserve currency for a lot of states," he said, predicting that it would regain parity with the dollar.

China has roughly $200 billion (£140 billion) in foreign reserves, the second largest in the world. A small proportion is believed to be in euros already in the form of deutschmark and French franc bonds, but a major switch in asset allocation from dollars to euros could be large enough to influence the currency markets.

The European Commission said yesterday that it was the political gesture that really mattered. "What's important is the political signal of confidence that this transmits, not the volume of money," said monetary affairs spokesman Gerassimos Thomas.

China and the European Union share a joint suspicion of American "hegemony" in the global economic system and have been edging towards mutual embrace for several years. Beijing has a strong interest in promoting a rival currency, but it has been waiting for clear evidence that the euro is a viable long-term currency before committing itself.

The Chinese backing for the currency came as a leading consultancy said that the economic case for Britain entering the euro will weaken in 2002 as UK interest rates rise and eurozone rates fall sharply.

The Centre for Economic Business Research also said that Britons' increasing familiarity with the new currency could present an "unusual opportunity for the UK to have its cake and eat it by staying outside".

It estimates that, by the end of 2002, just over half the UK population will have used euro notes and coins and that, as a result, the present majority against joining will erode.

However, CEBR believes the Government is unlikely to call a referendum within the next 18 months because it says 55pc to 65pc of voters would still come out against entry.

Adapted from The Telegraph: 07/01/2002