Thread: China Unlikely to Rescue Italy or Europe: Strategist

China eyes 20 pct in Italy's strategic fund -report

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MILAN, Sept 15 | Thu Sep 15, 2011 4:26am EDT

(Reuters) - China's sovereign investment fund could take a stake of up to 20 percent in Italy's strategic investment fund, Italian daily Il Messaggero said in an unsourced report on Thursday.

The China Investment Corporation could take 10-20 percent in Italy's strategic fund, which is being set up by the state-controlled holding Cassa Depositi e Prestiti SpA, it said.

The chairman of the CIC, Lou Jiwei, recently met Italy's Economy Minister Giulio Tremonti, the Bank of Italy, and CDP chiefs during a roadshow in Rome, it said.

Italy's strategic fund was set up in response to a wave of foreign takeovers of Italian companies, such as jeweller Bulgari and dairy firm Parmalat .

In July, CDP approved the fund's statutes and an initial 1 billion s ($1.37 billion) capital. The newspaper said the strategic fund became operational on Monday.

The fund is due to take stakes in infrastructure, defence, security, transport, communications and energy companies to support their expansion.

In recent days, there has been talk of emerging economies, such as China, investing in European government bonds.

($1 = 0.731 Euros) (Writing by Nigel Tutt)

China eyes 20 pct in Italy's strategic fund -report | Reuters

Will China bail out Italy by buying its bonds?

15 September 2011

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The Italian government is reportedly preparing to do a deal which could see its nation's assets bought by China's largest sovereign wealth fund.

The story was reported on BBC News, the Financial Times and the Wall Street Journal.

If the reports are to be believed China Investment Corporation (CIC), wholly owned by the Chinese government, has been holding meetings with Italian officials in the last month.

CIC, has deep pockets for sure; it has assets of around $400bn (£250bn).

The FT reported how Lou Jiwei, the chairman of China Investment Corporation, had met Italian finance minister Giulio Tremonti and other officials in Rome.

Since the meetings the Italian government has approved an austerity plan which will raise €54 billion ($74 billion) via tax increases and spending cuts over the next three years.

But the eventual efficacy of the plans, which sparked rioting on Wednesday evening (14 September), has been questioned

The Wall Street Journal noted that the "tortured" austerity package could help Italy comply with demands to eliminate the budget deficit by 2013, but may not actually help slash Italy's public debt by much.

The WSJ quotes Société Générale economist Vladimir Pillonca, who believes the austerity package will push Italy into recession, "even though the fiscal cuts are twice as large".

Italy therefore remains vulnerable. So long as the debt ratio remains high, doubts about Italy's solvency will remain.

The BBC notes that many analysts questioned whether a purchase of Italian assets by China would do anything to resolve Europe's debt problems.

They said there was still a danger the crisis would spread, not least because Greece was still at risk of defaulting on its debt holdings.

"Europe is not just lurching from one crisis to another. It is lurching into a new one before the previous one is solved," said Makoto Noji of SMBC Nikko Securities.

According to the International Monetary Fund, Italy will need funds equalling as much as 20% of its GDP in 2012 to refinance its debt while China has foreign exchange reserves in excess of $3 trillion.

Analysts said given its deep pockets, it was no surprise that countries were seeking China's help.

But on Bloomberg China’s Premier Wen Jiabao is quoted as being less than happy at the prospect of having to bail out a European economy. He maintains that developed nations should cut deficits and create jobs rather than relying on his country to bail out the world economy.

Zero Hedge blog asks why Asian investors should buy Italian bonds when they are not even being bought by the European Central Banks

The Italian Economy Minister Giulio Tremonti admits as such. "I note that the Bank of Japan today launched quantitative easing and the Swiss National Bank cut rates to zero, we are waiting for decisions if possible, but desirable (from the ECB)."

When you talk to Asia they say: "We don't understand what Europe is," he continued. "The second point is that they say 'if your central bank doesn't buy your bonds, why should we buy them?"

China.org points out that the Chinese are right to be wary. "They participated in the Portugal bonds this year, and they lost money."

So far In Beijing, the State Administration of Foreign Exchange, the nation's manager and regulator of the foreign exchange reserves, declined to comment on the reports.

But China's economic growth is largely reliant on the European economic bloc, via exports as well as the US; of course China is the world's biggest foreign holder of US government debt, with about $1.17 trillion.

So how long they choose to stand back is anyone's guess.

It's for that reason Rajeev De Mello, head of Asian Fixed Income at Schroders believes that Asia bonds themsevles are a investor's safe haven:

"There are a number of reasons why we strongly believe Asian currencies and fixed income will prove to be a superior store of value for the foreseeable future.

"The Asian economies are supported by strong economic fundamentals. There is strong growth potential in Asia. It is a diversified investment universe The sector has one of the best risk/return profiles over the last 10 years and there is the rise of China."

Will China bail out Italy by buying its bonds? - Investing Strategy - Mindful Money

Originally Posted by xinhui

At best, that could be seen as part of a larger desire by the Chinese to diversify their vast holdings of US dollar assets.

I was banking on this one.

...and to be able to brag

US + EU in Chinese pocket

But on Bloomberg China’s Premier Wen Jiabao is quoted as being less than happy at the prospect of having to bail out a European economy. He maintains that developed nations should cut deficits and create jobs rather than relying on his country to bail out the world economy.

To whom they will export if they don't bailout EU and USA?

EU, too big to fail.

Wen sets preconditions to help Europe - FT.com

Wen sets preconditions to help Europe

By Jamil Anderlini in Beijing and Lifen Zhang in Dalian
Wen Jiabao at the WEF in Dalian pix

Wen Jiabao, Chinese premier, has called on debt-laden European countries to put their “own houses in order” before asking China for a bail-out, in a sign of Beijing’s reluctance to be cast as a saviour for the global economy.

Speaking at the opening on Wednesday of the World Economic Forum in Dalian, China, Mr Wen also publicly linked Chinese investments for the first time with long-standing political demands, indicating a possible hardening of China’s position towards crisis-hit Europe.

“Countries should fulfil their responsibilities and put their own houses in order,” Mr Wen said. “Developed countries must undertake responsible fiscal and monetary policies. What is most important now is to prevent further spread of the sovereign debt crisis in Europe.”

The debt woes of peripheral European countries like Greece, Portugal and Ireland have spread in recent months to the much larger economies of Spain and Italy, leading many to question whether the single European currency will survive in its current form.

The markets suggest a default by Greece is near inevitable and the continent could easily slip back into recession.

In this context, European countries battling sovereign debt crises have been lobbying Beijing to use some of its $3,200bn in foreign exchange reserves to buy their bonds, something that Beijing appears increasingly reluctant to do.

The Financial Times reported this week that Italian officials had met with managers of the reserves and proposed significant increases of Chinese purchases of Italian bonds, as well as a number of direct investments in Italian industry.

But there has been no indication that Beijing is willing to step in as the buyer of last resort for unwanted Italian debt, or even make the kinds of positive comments Chinese leaders have made about Greek, Portuguese and Spanish debt over the past year.

Analysts and EU officials say high-level Chinese expressions of confidence in these countries’ solvency do not appear to have been matched by large-scale purchases of their bonds, and since those comments were made the spreads on those countries’ bonds have widened significantly.

Mr Wen’s comments were echoed on Wednesday by Li Daokui, an influential economist and member of the monetary policy committee of China’s central bank, which oversees management of the foreign reserves.

“I don’t think any country can be saved by China in today’s world,” Prof Li told a panel at the World Economic Forum. “Countries can only save themselves by pushing through reforms.”

Although he reiterated Chinese “confidence” in Europe’s ability to eventually emerge from the current crisis, Mr Wen made clear China was not about to make altruistic purchases of sovereign debt without seeing anything in return.

He said Europe needed to take “bold steps” in order to receive Chinese help and the first of those steps was a decision to formally grant China full “market economy” status.

This is a technical definition that has long been a key demand from Beijing and would allow Chinese companies to avoid or at least mitigate many costly and time-consuming trade disputes.

European officials say China does not meet the criteria of a market economy and stiff opposition from some member states makes it very unlikely the European Union will grant China this status soon.

They (EU) just imposed more anti dumping measures to Chinese products.

Guess they are cleaning the house EU-way.

sadly, that is Chinese import is far from the root cause of their problems.

Originally Posted by xinhui

sadly, that is Chinese import is far from the root cause of their problems.

Well talk to some EUropean and you will see China imports rated in top 3 causes to their problems. AT least this is what I hear on the fairs.

imports is not, trade imbalance is -- according to some myth. I really don't consider EU's structural problem and their overspending can be traced back to trade imbalance with China. EU's trade imbalance is much less that of the US. with some members enjoying a small surplus.


Here are some numbers..

EU trade balance deficit

EU trade balance deficit – 11.7 billion euro


November 15, 2010
1 comment

The European Union (EU) balance of trade has reached 11.7 billion euro deficit, compared to the September of 2009, when the budget deficit was 10.5 billion euro, indicate Eurostat data.

While this year in August the budget deficit was at the extent of 17.7 billion euro in contrast to 11.2 billion euro in August 2009. Comparing this year’s September to August, the export has increased by 0.7%, while the import has dropped by 1.5%, according to seasonally adjusted data.

In September 2010, the balance of trade with the rest of the world has created a surplus of 2.9 billion euro in the eurozone. In August 2010 the trade gap reached 5 billion euro, compared to 1.7 billion euro deficit in August last year.

Comparing this year’s September and August indicators, the export has climbed by 0.7%, while the import has decreased by 2.5%, according to seasonally adjusted data

The EU deficit has grown for the energy, but the surplus has formed for the industrial goods. Moreover, in the period from January to August, compared to the same period in the preceding year, the volume of trade between the EU and its major partners has increased. The largest export growth has been registered to Brazil (54%), China (39%) and Turkey (36%), while the largest increase in the import was from Russia (42%), China (28%) and India (27%).

The trade surplus in the EU has grown with the US, Switzerland and Turkey, but the amount of deficit has increased with China, Russia, Norway and South Korea.

As concerns the overall trade in the EU, the biggest surplus was observed in Germany, Ireland, the Netherlands and Belgium. Whereas, the largest deficit – in the UK, France, Spain, Greece, Italy and in Portugal.

During the period from January to August, compared to the corresponding period in 2009, Latvia’s export has risen by 29%, while the import – by 16%. Overall, Latvia’s trade balance deficit this year was -0.9. Estonia’s deficit reached -0.5, but Lithuania’s -1.2.