Monday, January 10, 2011

Europe - "China, please help!"

We don't think so, but it might not hurt to ask anyway. This article from Time discusses the likelihood of China stepping up to the plate to buy European bonds that nobody else wants. Sure, Europe is important to China and visa versa, we've all heard that before. However just because our biggest customer can no longer pay his bills and may go under, doesn't mean we want to lose more money trying to keep him afloat, right? The truth is that China likely could be self sustaining if it would just let its currency rise. Why sell to Europe if they can sell to their own people? Here is a nice excerpt from the article:

Is China the silver bullet for the euro crisis? Clearly, Beijing has the money. Analysts estimate that China's currency reserves likely came close to $2.8 trillion at the end of 2010 – almost triple the size of Europe's entire bailout fund for weak sovereigns, cobbled together in May. And there are logical reasons why Beijing would want to use some of that war chest to help Europe. But like all of the previous efforts to resolve Europe's problems, the notion that China can or will significantly alleviate the debt crisis is likely just another mirage.

That's not only because China is highly unlikely to commit the sort of funds necessary to rebuild investor confidence in Europe's debt-heavy, slow-growing economies, but also because cash is only part of the solution to Europe's current problems.

In some ways, China's promises to support Europe make perfect sense. China has already been using its financial clout to expand its influence around the world (in the rest of Asia, Latin America and Africa) so why not in Europe as well? And since Europe (not the U.S.) is China's No.1 export destination, stabilizing the economy of Europe is in the interests of the Chinese economy. Buying euro assets also helps China in its stated goal to diversify its currency holdings (which are probably about two-thirds in U.S. dollars). The Wall Street Journal printed an interesting estimate the other day that China may already hold some $900 billion in euro zone sovereign debt, or nearly 10% of the total issued. So China probably will keep buying euro zone debt.

But how much? Who knows. An unconfirmed newspaper report claimed that Li said China was willing to splurge on about $7.9 billion in Spanish bonds. That would help, of course, but in reality it's merely a drop in the bucket. Greece, Portugal, Spain and Italy are looking to raise billions in bond auctions this week alone. It would also be very wrong to assume China will choose political over economic priorities when allocating its currency reserves. China, like any good investor, wants to maximize its returns, and Chinese policymakers aren't stupid enough to buy more and more European government bonds when debt restructurings and defaults are a real possibility.

And if China is buying, Beijing isn't buying enough to make a bit of difference. The confident statements and pledges of funds from Li have had no discernable positive impact on investor sentiment towards the euro zone. Bonds of weak euro zone states have taken a pounding during Li's visit; so did the euro, which plunged more than 3% against the dollar last week. China, then, isn't the answer to the euro's prayers.

Source: http://curiouscapitalist.blogs.time.com/2011/01/10/can-china-save-the-euro/

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