China Unlikely to Rescue Italy or Europe: Strategist

[xinhui]

Talk of the street.

China Unlikely to Rescue Italy or Europe: Strategist
By Matt Nesto | Breakout – Tue, Sep 13, 2011 2:01 PM EDT

China Unlikely to Rescue Italy or Europe: Strategist | Breakout - Yahoo! Finance

Well that was fun. The mere thought of a new Sino-Roman investment deal sparked a brief moment of giddiness Monday that the markets have not seen in weeks. Gone were the worries. The foibles forgotten. For 30 brief minutes, China was going to save the world via a shopping spree of Italian debt.

In hindsight, as is often the case, the absurdity of that "silver bullet" solution becomes clear, and since that moment of madness captivated the world, analysts have been coming forward to knock it down, including Standard & Poor's Strategists Alec Young.

"Certainly if China was willing to commit a trillion dollars, a third of their reserves, to bailing out sovereign Europe, that could be a big deal, but I don't think we're there" says Y0ung. "We don't even know what they're doing, if anything, and it's probably going to be something much smaller scale. I don't think they would want to jeopardize their portfolio by making a major commitment to some of the shakiest bonds in the world."

A year ago, China did buy into a beleaguered bond market, with a $400 million stake in Spanish debt. At best, that could be seen as part of a larger desire by the Chinese to diversify their vast holdings of US dollar assets. At worst, given what has transpired in Spain and Europe over the past 12 months, it points to bad timing.

"Barring a major, trillion euro commitment, I don't think it's enough to really solve the problem. It's just the kind of knee-jerk news that gives you a short-covering rally," Young says.

Furthermore, Young says the simple fact that investors reacted the way they did to the notion of a quick external fix "implies a lack of understanding of what is really going on over there." He bluntly adds, "I don't think most American investors get it yet."

"If you look at the track record of China making these marginal investments, it has not correlated to the end of the crisis. So people may want to keep that in mind as they evaluate this Italian news."

In the meantime, Young says a Greek default looks likely and that further austerity cuts are needed to restore investor confidence. Short of that, Young is prepared for a long and ugly workout. "Unless China decides that it's going to commit just obscene amounts of money to backstopping the EU, and I think it's too early to say that yet, we remain pretty cautious on this whole Europe situation."

[xinhui]

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

Related News




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

[xinhui]

Will China bail out Italy by buying its bonds?

15 September 2011

inShare

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

[Double Edge]

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

[Doktor]

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?

[xinhui]

EU, too big to fail. :red:

[xinhui]

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.

[Doktor]

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

Guess they are cleaning the house EU-way.

[xinhui]

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

[Doktor]

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.

[xinhui]

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.

[Laser]

The sovereign debt issue is turning into a real hot potato.

Is it becoming apparent to anyone else but me, that the U.S. and Euro are trying to backstop each others debt, and may be reaching their limits, and are trying get get China involved. And that China is not likely to help in a truly meaningful way, but instead may be positioning themselves to go shopping when the various economies begin to REALLY fail?

And where is the GCC in all of this? I keep asking myself why, during a worldwide recession, the price of oil is still so high? In previous recessions, the price of oil would fall and that would lead to confidence in future growth. The markets would take a deep breath, recognizing that, as long as the main cost of growth (energy) remained affordable, economies had a tool to use, to dig themselves out of debt.

The answer to my question, of course, is that oil is now much like gold; more of a hedgeing tool, rather than a commodity. Even if the Gulf countries opened the flood gates of oil production, the trillions in currently idle investment capital would suck it into a portfolio, as soon as it came out of the ground.

Do these observations sound credible?

[xinhui]

commodity is a hedging tool, there is no question about it. I have been saying commodity is the next great bubble for over a year now.

[editec]

commodity is a hedging tool, there is no question about it. I have been saying commodity is the next great bubble for over a year now.

I concur.

Clearly gold and silver are bubble city.

And just recently the SEC uncovered still another plot to manipulate the price of oil to defaud that market.

I believe that the manipulation of these markets by savey investors is playing a large role in spiking commodities prices.

Of course we cannot KNOW that until the SEC finds evidence to support that theory.

And by then?

It's too late for most honest investors.

But when the price of a commodity spikes 10-20-30% with no equivalent demand side explaination for it?

Well we have to know something's afoot.

And personally, I do not think it's all just stemming from people buying commidities futures as a HEDGE against a crashing dollar.

That just doesn't make sense, either.

[xinhui]

China could play key role in EU rescue - FT.com

Last updated: October 27, 2011 11:29 pm
China could play key role in EU rescue

By Jamil Anderlini in Beijing and Richard Milne in London
EU and China flags

China is very likely to contribute to the eurozone’s bail-out fund but the scope of its involvement will depend on European leaders satisfying some key conditions, two senior advisers to the Chinese government have told the Financial Times.

Any Chinese support would depend on contributions from other countries and Beijing must be given strong guarantees on the safety of its investment, according to Li Daokui, an academic member of China’s central bank monetary policy committee, and Yu Yongding, a former member of that committee.
More
On this story

In depth Eurozone in crisis
Editorial Europe continues down a rocky path
Sarkozy warns on growth and austerity
Eurozone business wary of foreign help
Wolfgang Münchau Half measures will not end the crisis

ChartsClick to enlarge

Financial markets reacted with relief hours after a European deal was agreed at a summit aimed at calming the two-year-long sovereign debt crisis. The plan includes recapitalising European banks, making them accept a loss of 50 per cent on their holdings of Greek debt and boosting the firepower of the rescue fund, known as the European Financial Stability Facility.

The S&P 500, which rose 3.4 per cent, is on course for its best monthly gain since October 1974. The FTSE All World stock index gained 4.1 per cent, its best one-day rise since May 2010.

Bank stocks also increased sharply with the S&P financials index gaining 6.2 per cent, led by big commercial banks. The dollar slumped 1.6 per cent, its biggest one-day drop since May 2009, as the euro surged more than 2 per cent, above $1.42.

“It is in China’s long-term and intrinsic interest to help Europe because they are our biggest trading partner but the chief concern of the Chinese government is how to explain this decision to our own people,” said Professor Li. “The last thing China wants is to throw away the country’s wealth and be seen as just a source of dumb money.”

He added that Beijing might also ask European leaders to refrain from criticising China’s currency policy, a frequent source of tension with trade partners. The US argues that an intentionally undervalued renminbi unfairly supports Chinese exports.

In spite of discomfort among some Europeans about Chinese investment, the comments represented a fillip to eurozone leaders hours after a summit aimed at calming the two-year-long sovereign debt crisis.

With $3,200bn in foreign exchange reserves, roughly a quarter of which are believed to be held in euros, China could be willing to contribute between $50bn and $100bn to the EFSF or a new fund set up under its auspices in collaboration with the IMF, according to one person familiar with the thinking of the Chinese leadership.

“If conditions are right then something a bit above $100bn is not inconceivable,” this person said.

President Nicolas Sarkozy of France welcomed the prospect of a Chinese contribution to the eurozone rescue package. “Our independence would not be put into question by this,” he said in a television interview. “Why would we not accept that the Chinese had confidence in the eurozone and place a part of their surpluses in our funds or our banks. Would you rather they placed it with the US?”
More video

Klaus Regling, head of the EFSF, was due to arrive in Beijing late on Thursday for discussions with senior Chinese leaders on whether and how much China might contribute. President Sarkozy telephoned his Chinese counterpart Hu Jintao a few hours after the summit ended to discuss the rescue plan but there was no immediate announcement on any Chinese involvement.

European leaders agreed that the EFSF would explore two plans to increase its remaining firepower from about €250bn to €1,000bn. One would be to offer investors insurance on selected government debt while the other would create a special fund in which countries such as China could invest.
beyondbrics
Workers rush to produce more Chinese national flags at a factory

Chinese companies are increasing their appetite for corporate acquisitions in Europe

One condition China might ask for is that its contribution be at least partly denominated in renminbi, which would protect its investment against currency fluctuations. China would buy euro-denominated bonds but repayments would compensate for any changes in the value of the renminbi, which has appreciated nearly 20 per cent against the euro in the past three years.

Reflecting the unease in Europe, the head of Germany’s industry association said he feared Chinese help could “come at some political cost”. Hans-Peter Keitel told the FT: “Asking a non-eurozone nation to help the euro would give the other nation the power to decide the fate of the single currency.”

The global focus on how China might contribute to the European rescue plan illustrates its increased influence on the world stage and many in Beijing believe this crisis presents an opportunity for it to display global citizenship and responsibility commensurate with its rising status.

Beijing’s main concern is how any contribution to a European bailout will be viewed domestically by an increasingly informed and critical populace.

“Any mis-steps in helping Europe could cause problems with domestic public opinion – the Chinese people will watch very carefully what their own government does,” Prof Yu said. “European leaders also must have a clear plan of what to do and they must show China they have the political will as well as the support of their own people; if we see protests and chaos all the time, then China won’t have confidence in Europe’s political ability.”

Addditional reporting by Gerrit Wiesmann in Berlin