China to the Rescue?

Conclusion: Recent rhetoric suggests China continues to stand ready and willing to step up its aid to ailing European nations. Only this time, it expects a great deal more in return.

 

Rhetoric around the next great bailout out of China has been swirling about the wires over the past 24-48 hours. We think it’s important to highlight China’s official stance by filtering through what’s been said thus far. Perhaps the largest takeaway is that Beijing wants favors in return and any further large-scale assistance is likely to come alongside some nice perks for the Chinese economy.

 

Regarding the need to extend additional help:

“What is most important now is to prevent the further spread of the sovereign debt crisis in Europe.” – Premier Wen Jiabao

 

“Chinese policymakers are thinking in a global context and about the need to prevent a domino effect in the European debt crisis.” – Zhang Yansheng, a researcher affiliated with China’s National Development and Reform Commission

 

Regarding what incremental actions China plans to pursue, if any:

“China is willing to buy [additional] bonds from nations involved in the sovereign debt crisis.” – NDRC Vice Chairman Zhang Xiaoqiang

 

“China can best contribute to the global economic recovery by ensuring steady growth at home.” – Premier Wen Jiabao

 

What China wants to see in return for such aid:

“Developed countries must take responsible fiscal and monetary policies.” – Premier Wen Jiabao

 

“If the U.S. introduces a third round of quantitative easing, this will further increase the global inflation pressure.” – NDRC Vice Chairman Zhang Xiaoqiang

 

“The nation wants countries including the U.S. [and E.U.] to become more open to investment by Chinese companies, which will create local jobs.” – NDRC Vice Chairman Zhang Xiaoqiang

 

“China is also actively allocating foreign reserves via commercial banks to support domestic companies going abroad. China will also use foreign reserves to secure important commodities or find resource assets overseas.” – NDRC Vice Chairman Zhang Xiaoqiang

 

“[The U.S. and E.U.] should recognize China’s full market economy status before the 2016 deadline set by the World Trade Organization. To show one’s sincerity on this issue a few years ahead of that time is the way a friend treats another friend.” – Premier Wen Jiabao

 

Lastly, what China has done thus far:

“We have on many occasions expressed our readiness to extend a helping hand, and our readiness to increase our investment in Europe.” – Premier Wen Jiabao: 

  • In October ’10, Premier Wen Jiabao pledged to purchase Greek sovereign debt and Beijing also authorized $267.8 million in Chinese bank loans to three Greek shippers;
  • In a November ’10 visit to Portugal, President Hu Jintao stated that China was available to support the country;
  • In April ‘11, China pledged to support Spanish sovereign debt after Spanish Prime Minister Jose Luis Zapatero visited Beijing; and
  • In June ‘11, Premier Wen Jiabao pledged step up China’s support of European sovereign debt by funding a “limited volume” of new issues, immediately putting $1 billion on the tape for Hungarian bonds. 

Net-net, recent rhetoric out of China suggests Chinese officials believe firmly that they are negotiating from a position of strength, and, thus, are expecting to dictate policy perhaps a bit more than they have in the past – i.e. “no QE3”. Like the shrewd investor the country has proven itself to be over the years, China appears to favorably view European (and some U.S.) corporate assets with an eye for “blood in the streets”. To the extent foreign policymakers are ready to allow China greater access to more sensitive assets, will go a long way in determining how much more participation we are to expect from China on the bailout front.

 

Darius Dale

Analyst