Tuesday, February 21, 2012

China to Continue Investing in Europe

Bloomberg: China to Get 'More Involved' in Europe Rescue, Holds Euros
China Daily: Hu Vows to Further Cooperation with EU
Forbes: China Gets on Board with Euro Bailout, Stocks Jump
Reuters: China to Keep Investing in Euro Zone Debt: China Central Bank

Europe is currently in the midst of a deep financial crisis. In the past, China (and other emerging markets such as Brazil and Russia) has contributed money to help fund the European bailouts with the hope of alleviating the European sovereign debt crisis. On the heels of new austerity measures in Greece that led to intense rioting and projections that Greece could face a prolonged and severe economic recession, China made an announcement that it plans to continue investing in Europe and contribute to future bailouts, which is positive news for Europe.

In recent international discussions, the Chinese government has indicated that it is ready to play a larger role in solving the sovereign debt crisis, which would ease the burden on the European Financial Stability Fund (EFSF) and the International Monetary Fund (IMF) to raise funds for future bailouts. China also noted its support for the measures the EFSF and IMF have taken thus far, and that it will continue coordinating with these organizations in the future.

The Chinese Central Bank, which holds approximately $800 million in euro-denominated financial instruments, recently reiterated its belief that the future prospects for the euro as a currency are strong—a statement that strongly increased market confidence in the euro. As evidence of that belief, China will not seek to reduce its exposure to changes in the euro exchange rate by selling its euro-denominated holdings.

Observers believe that China, with $3.2 trillion in foreign exchange reserves, may have the financial power to single-handedly bail out some troubled European governments. China, however, is reluctant to make economic decisions simply to help struggling economies. It is willing to invest in Europe, but only if the investments are liquid, secure, and will increase in value. For example, China currently believes that “hard assets” (buildings, businesses, inventory, etc.) are more appealing than European government bonds because hard assets can be sold in a worst case scenario to recover some of the initial investment, an option not available for government bonds.

China, however, is not suggesting that it will invest in “hard assets” to the complete exclusion of European government debt. China is committed to investing in European governments and will continue to encourage its companies to invest throughout Europe. European leaders hoping that China will use its vast foreign exchange reserves to fund a very large percentage of future European bailouts will likely be disappointed, as China views the risk associated with such a bailout greater than the potential monetary reward.

While some are disappointed in the role China has decided to play, China’s recent support of Europe is a positive sign. China’s willingness to invest in European assets and contribute some additional funds to future bailouts (if European countries send a clear message that they are working to get their finances in order) gives hope that Europe will be able to avoid a financial catastrophe. While China may not solve the European sovereign debt crisis on its own, the signal that China is prepared to work with Europe to solve the crisis should alleviate some European fears.


alternative investments said...

Keep in mind that China also has it in its own economic interests to invest in Europe. This is true of European sovereign bonds. Europe is a big export market for China, and if there is a severe recession in Europe China's economy will take a major hit too.


China is geting a little ahead of itself.