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China in talks over buying Italian debt

• Italian finance minister meets China’s sovereign wealth fund
• Traders hope Beijing will help tackle eurozone crisis
• Obama voices fears over Italy and Spain
• News of talks spark Asian rally but FTSE flat

China could step in to help rescue Europe from its debt crisis after holding top-level talks with Italy’s finance minister.

The Italian government confirmed on Tuesday that Giulio Tremonti had met the head of China Investment Corp, the country’s sovereign wealth fund, in Rome last week. It is understood that Tremonti asked the Chinese delegation to consider buying Italy’s sovereign debt and making strategic investments in Italian companies.

The Italian treasury declined to give details of the meeting, but traders were encouraged that Beijing might use its financial muscle to help the eurozone.

News of the talks came as Barack Obama warned that the world economy would suffer badly if Spain and Italy were sucked deeper into the European debt crisis.

“Greece is obviously the biggest immediate problem. And they’re taking some steps to slow the crisis but not solve the crisis,” Obama said, at a roundtable of Spanish journalists in Washington. “The bigger problem is what happens in Spain and Italy if the markets keep making a run at those very big countries,” the president added.

Silvio Berlusconi’s government is pushing an austerity budget through parliament in an effort to cut its deficit and persuade the financial markets that it remains solid. But Italy’s borrowing costs jumped on Monday amid fears that Greece could default on its debts and fall out of the eurozone. Another auction of Italian government debt, worth €3bn-€4bn (£2.6bn-£3.4bn), is due on Tuesday.

Back in June, Chinese premier Wen Jiabao said China could offer “a helping hand” to Europe by investing in sovereign bonds. Analysts, though, questioned whether China would provide a significant amount of funding for troubled European countries .

“We have heard this story before with regard to the likes of Spanish and Portuguese bonds and in the end it was the European Central Bank buying and EU bailouts that seemed to have taken place rather than anything with a Chinese influence,” said Gary Jenkins, head of fixed income research at Evolution Securities. “If it really came to pass then it would provide an immediate confidence boost. I just won’t hold my breath.”

News of the talks sparked a rally in Asia, where Japan’s Nikkei closed nearly 1% higher. European markets were more muted, with an early rally on the FTSE 100 running out of steam in the first hour’s trading.

In the bond markets, the yield – interest rate – on 10-year Greek debt hit a new record high of 25% in early trading. UK government bonds rose in value again, pushing down the yields on the 10-year gilt to another record low of 2.175%.

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