China to Europe's Rescue?

Posted by: Linda Yueh on February 16, 2012

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China’s willingness to support Europe to cope with sovereign debt problems is sincere and firm.

China is ready to get more deeply involved in participating in solving the European debt issue. — Chinese Premier Wen Jiabao

Wen made these very positive statements at a joint press conference in Beijing on Feb. 14 with EU President Herman Van Rompuy and European Commission President Jose Manuel Barroso.

Unsurprisingly, Van Rompuy said at the same press conference that he welcomed the interest China has shown in investing in European sovereign bonds and the region’s rescue fund.

Wen ended the EU-China summit by confirming that China is considering more involvement in the two euro area rescue funds: the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM). This would be music to the European leader’s ears. Plus, Vice Premier Li Keqiang, mooted to be the next Premier, also said that China wants to support EU during its debt crisis when he met with Van Rompuy and Barroso.

So far, so good. But when and in what form might this help come? In terms of timing, Wen says that China expects “those highly indebted [European] countries to strengthen fiscal consolidation, cut deficits and reduce debt risks in light of their national conditions.” He added: “We hope the EU will soon reach internal consensus, make the political decision and send to the international community a clearer and a stronger message of policy responses.” Waiting for that may take a while.

Wen made clear that gaining access to European markets and enhancing trade is the most urgent issue. There may be a difference in views here in terms of what’s most pressing. As for what form the aid make take, Lou Jiwei, the head of China Investment Corp. (CIC), the country’s giant sovereign wealth fund, said that the German Chancellor Angela Merkel asked China to buy German and French government debt when she visited there in the first week of February. Sovereign wealth funds typically invest in real assets or buy equity shares, so that’s not too likely. But, the People’s Bank of China (PBOC) or SAFE (China’s foreign exchange management body) could buy government debt as part of their reserve accumulation.

Indeed, PBOC Governor Zhou Xiaochuan said, “China will always adhere to the principle of holding assets of EU sovereign debt.” The governor outlined the three avenues that could offer help: the central bank, the CIC and the banks that are arms of the state: China Development Bank, Export-Import Bank and others.

The latter, though, are more likely to invest than to buy government debt. In fact, China has repeatedly emphasized the benefits of being a source of investment at a time when Europe is facing tight credit conditions, especially for utilities, where returns are stable and thus attractive to the Chinese. (For instance, CIC invested in Thames Water.) Europe could indeed use more investment, including in infrastructure, as its economy registered the first negative quarter since 2009 when fourth-quarter 2011 GDP contracted by 0.3%. This could help, but may not be quite what the euro leaders were hoping for.

The key unanswered question is whether China could invest in the EFSF or ESM, perhaps helping to “leverage” these funds as the current cap of €500 billion is considered to be too small to serve as an effective firewall for the euro crisis. Plus, China made no indication as to whether it would increase its contributions to the IMF - that was an aim of Van Rompuy during the visit- since the IMF could serve that role.

Nevertheless, Zhou said that China has “expressed clearly” through the G-20 that it will not reduce the proportion of its investment in euro assets during the global financial crisis and European debt crisis. Maintaining the euro’s status as the second reserve currency in the world must count for something, especially as that implies purchases of euro sovereign debt, while they await possible Chinese investment in the rescue funds.

Reader Comments

Frank

February 16, 2012 5:49 PM

Funding the EFSF or ESM is not investing, it's merely encouraging the flawed funding mechanism to perpetuate the economic problems of the EU. To truly invest in Europe would be to partner with the right areas of Europe post default thus starting from a more sound base. The difficulty of course is to not confuse right areas with the same old system just in a different shell or known by some other name.

Steve

February 21, 2012 7:49 PM

Its seems almost absurd that a comunist country is going to solve the European debt crisis, what is the world coming to?

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February 27, 2012 10:57 AM

PB, reads that post, the light bulb goes on, He ieadmimtly runs to his phone and calls John Boehner Sir,No Tax Increases Do you hear me, No Tax Increases I want my checks .

Yon

February 29, 2012 12:32 AM

Here is what I am wlnliig to cut from your list. Since I assume you did not go through the budget yourself I take it this is the Teabagger wish list'. I haven't went through the budget either so we will work from your list. The Departments you listed will stay, but at 2008 spending levels for 3 years.Save America ?s Treasures Program. $25 million annual savings.International Fund for Ireland . $17 million annual savings.Hope VI Program. $250 million annual savings.Eliminate duplicative education programs. H.R. 2274 (in last Congress),authored by Rep. McKeon, eliminates 68 at a savings of $1.3 billion annually.U.S. Trade Development Agency. $55 million annual savings.Woodrow Wilson Center Subsidy. $20 million annual savings.Cut in half funding for congressional printing and binding. $47 million annual savings.John C. Stennis Center Subsidy. $430,000 annual savings.Heritage Area Grants and Statutory Aid. $24 million annual savings.Cut Federal Travel Budget in Half. $7.5 billion annual savingsTrim Federal Vehicle Budget by 20%. $600 million annual savings.Essential Air Service. $150 million annual savings.Manufacturing Extension Partnership (MEP) Program. $125 million annual savings.Beach Replenishment. $95 million annual savings.New Starts Transit. $2 billion annual savings.Exchange Programs for Alaska , Natives Native Hawaiians, and Their HistoricalTrading Partners in Massachusetts . $9 million annual savingsAppalachian Regional Commission. $76 million annual savings.Economic Development Administration. $293 million annual savings.FreedomCAR and Fuel Partnership. $200 million annual savings.Economic Assistance to Egypt . $250 million annually.U.S. Agency for International Development. $1.39 billion annual savings.General Assistance to District of Columbia . $210 million annual savings.Presidential Campaign Fund. $775 million savings over ten years.No funding for federal office space acquisition. $864 million annualsavings.End prohibitions on competitive sourcing of government services.IRS Direct Deposit: Require the IRS to deposit fees for some services it offers(such as processing payment plans for taxpayers) to the Treasury, instead of allowing it to remain as part of its budget. $1.8 billion savings over ten years.Eliminate death gratuity for Members of Congress.Eliminate Mohair Subsidies. $1 million annual savings.Eliminate Market Access Program. $200 million annual savings.USDA Sugar Program. $14 million annual savings.Subsidy to Organisation for Economic Co-operation and Development (OECD). $93million annual savings.Eliminate the National Organic Certification Cost-Share Program. $56.2 millionannual savings.Those are what I am wlnliig to cut from your list.I agree that the US reserves the right to strike with out warning in retaliation of any proven (not made up proof like Bush did) terrorist acts that come from another country. Up to the use of high altitude bombing or the use of any nuclear weapons, I won't sanction them. Precise and deadly in and out raids are acceptable.I favor the flat tax on all income with one exemption per tax payer of $26,000 for personal income tax because it is simple and fair. No complexity to get tangled up in. Simple and efficient. I would lower the rate to 15%. The same deal for business, all income taxed and no exemptions with a tax rate of 10%.I would also like to suspend all foreign aide for three years.I would also agree to roll back the budget items kept to 2008 levels for 3 years.In return I want the following:33% cut in Military spending.Removal of TSA and downsizing of Homeland Security including repeal of Patriot Act.Elimination of separate retirement for Congress Critters.Elimination of protection of elected and appointed officials from drug testing. (They should be tested like all other government employees)Pay back all money owed to Social Security and never include it in budget talks in the future. Allow SS to remove cap on taxed income (currently set at $109,000). Along with the 3 year bipartisan panels I mentioned in previous post this should put us in a position in three years to assess what more is needed.

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Financial markets are on the edge as investors await a solution to the European debt crisis. This blog examines the banks that hold billions of euros worth of Greek, Italian, and other sovereign debt; the governments that must pay off or refinance that debt; and the implications for the worldwide financial system if they can't.

Analyses or commentary in this blog are the views of the author and or commentators, and do not necessarily reflect the views of Bloomberg News.

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