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China urged European policy makers to back their tough talk with action on Tuesday by showing they can contain the euro zone's festering debt problems.

China, which has invested an undisclosed portion of its $2.65-trillion reserves in the euro, said it backed Europe's efforts so far to tackle the debt problems, but made clear it would like to see the measures having more effect.

"We are very concerned about whether the European debt crisis can be controlled," Chinese Commerce Minister Chen Deming said during a dialogue between China and the European Union (EU), its biggest trade partner.

"We want to see if the EU is able to control sovereign debt risks and whether consensus can be translated into real action to enable Europe to emerge from the financial crisis soon and in a good shape."

Concerns that Europe's debt problems could engulf bigger economies such as Spain have weighed on global financial markets this year and taken a toll on the euro.

The currency suffered yet another setback on Tuesday when credit agency Moody's warned it may cut Portugal's rating by one or two notches due to its weak growth prospects and steep borrowing costs.

China's Vice Premier Wang Qishan said Beijing had played its part to ease Europe's plight and held out hope that a turning point was near.

"The EU has taken active measures to deal with the debt crisis, and we hope the measures can achieve some results as soon as possible," Wang said at the opening of the trade dialogue.

But he said risks abounded, with global demand and the world economy still tepid, and financial markets mired in choppy trade and excess cash.

STRONG RHETORIC

For its part, Mr. Wang said China would pursue monetary prudence and active fiscal policies to ensure the world's second largest economy would sustain its solid growth.

In part to protect its euro investments, China has repeatedly expressed its support for the common currency this year and vowed to buy bonds from Greece, whose fiscal meltdown in May set off the latest debt rout.

Analysts said China's rhetoric on Europe's troubles was driven by both economic and political factors.

Xu Biao, an analyst with China Merchants Bank, said on the one hand China was reluctant to see a struggling Europe propel commodity prices higher by following the Federal Reserve in unveiling a massive round of quantitative easing.

On the other hand, Mr. Xu said China is well aware that as the owner of the world's largest foreign reserves, it wields power over the euro and the debt crisis has given it a new bargaining chip over other outstanding issues with the EU.

"The more important China's support is, the more powerful China is," Mr. Xu said. "When you have such a large foreign exchange reserve, you will use it as a tool to achieve your strategic goals."

TRADE TENSIONS

The annual trade talks between China and the EU highlighted a number of bilateral issues that need resolving, from trade and currency spats to intellectual property theft, all of which have raised tensions in recent months.

China is concerned by what it sees as growing European protectionism and trade tariffs.

The EU is worried, among other things, about Beijing's "indigenous innovation" policies to boost homegrown technology and about possible disruptions to supplies of rare earths used in many high-tech and clean energy products.

China produces 97 per cent of the world's rare earths, a key ingredient for making auto parts and high-tech products. Advanced economies also worry that "indigenous innovation" could be used by China to shut out their products.

"We have made the point strongly that this is a major concern to EU business and our Chinese colleagues reiterated that rare earth supplies will be sustained," the EU Trade Commissioner Karel De Gucht told a news conference after the meeting with Chinese officials.

"We have discussed indigenous innovation, and agreed we will not treat products and services differently based on where patents are registered," he said.

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