JR Max Wheel & Graham Reid
29 December 2010
It matters not how slowly you go, as long as you do not stop- Confucius
Whilst investors carry on dumping the debt of EU peripheral countries, China has done the reverse by buying them instead. It has done so in Greece and seems likely to follow this up with Spain and Portugal. The announcement made just before Christmas caused a minor Euro rally and has undoubtedly made hedge funds pause. No wonder, looking at the sheer scale of China’s reserves, now valued at over $2.65 trillion.
There is also mounting concern at the ineptitude of the Eurozone’s leadership. China has warned that the EU needs to prevent an “acute problem” from becoming a “chronic one”. Whilst the bulk of its reserves are, as far as we know in US Dollars- an estimated 65%, it also holds approx. 25% in €. It has every reason to worry about the value of both, but this is not the real reason, nor is it some kind of global good neighbourly policy. It seems more probable that China wishes to see an effective counterweight to the US and vitally, to keep the EU marketplace open to Chinese exports. So buying up the debt of dysfunctional EU states makes a great deal of sense, whether you wish to prop up the single currency or keep it alive long enough, until there is a serious attempt at reform and a decisive move towards a new global standard.
China has also formally called for the replacement of the US $ as the world’s reserve currency and backed the use of an enhanced SDR, in which the Yuan would clearly form an important part. Economic power drives political power and influence and China is intent on deriving the latter.
There is nothing new in China’s overseas investment policies, except scale: it has made significant inroads in Latin America by financing projects in Argentina, Brazil, Venezuela and Ecuador. It has targeted mineral and oil rich states in Africa, where trade now tops $100 bn. per annum.
It must come as no pleasure to the EU elite to find China effectively acting as buyer of last resort for the debt of its member States, but that rather neatly summarises the relative political and economic weakness of a divided and demoralised Europe. Just welcome the red envelopes (hong bao) that accompany The Chinese New Year: as for the rest of us, Bonne Année 2011!