Conclusion: We continue to hold the belief that China will not be a source of dumb capital to be used to help Europe fund its bailout mechanisms – if so, it would have done so already in OCT/NOV at much lower prices. Furthermore, we are of the belief that China will continue to demand concessions in return.
It’s clear that speculation around China’s [pending] involvement in funding the Eurocrat Bazooka matters to global financial markets, particularly considering a short-seller’s fear of: “China to buy everything.” What remains unclear to us, however, are the key details around China’s involvement: “When, how, and to what extent?”
The “why” is a given: in aggregate, Europe is China’s largest export market, accounting for nearly 19% of mainland Chinese shipments in 2011 (*Hong Kong and Singapore also re-export a great deal of Chinese products as well).
Moreover, with Chinese exports falling -0.5% YoY in JAN on sequentially-slowing YoY growth in shipments to Europe (-3.2% YoY in JAN vs. +7.2% YoY in DEC), the heat is incrementally on Chinese policymakers to come to Europe’s aid – particularly in light of this morning’s weakening European growth data (slowing GDP growth across the board).
Going back to the most important questions of: “when, how, and to what extent”, we continue to get left in the dark as far as the key details are concerned, leaving our Global Macro team with a thirst for more data in this regard. Consensus speculation on what the Chinese can do (as opposed to re-positioning according to what they will do) carries a great deal of risk at current prices.
This we know – the Chinese can channel investments into Europe via the following three avenues:
- An incremental rebalancing of its $3.2 trillion away from USD, GBP, or JPY assets and into EUR assets on the margin;
- Incremental investment from China Investment Corp, the nation’s $400B+ sovereign wealth fund; and
- Potentially through state-owned financial institutions such as China Development Bank and Export-Import Bank of China.
Moreover, PBOC Governor Zhou Xiaochuan did come out and say that the five “BRICS” countries all hold a “very positive attitude towards helping Europe”, they must continue to wait for the “right time and right opportunity” to invest. He went on to echo Premier Jiabao’s recent commentary that, “China hopes for more innovation from Europe to provide more lucrative products that are truly appealing to Chinese investors.”
All told, we continue to hold the belief that China will not be a source of dumb capital to be used to help Europe fund its bailout mechanisms – if so, it would have done so already in OCT/NOV at much lower prices. Furthermore, we are of the belief that China will continue to demand concessions in return (including real austerity, which is not equal to the promise of future austerity). Refer to our SEPT ’11 note titled “China to the Rescue?” for more details.
Below is a collection of our published remarks from 4Q that chronicle China’s [often-alleged] commitment to financing the Eurocrat Bazooka. The key themes of “when”, how”, and “to what extent” remain paramount:
- China is allegedly to create a new investment vehicle to manage $300B in EU/US assets. The fund is to mimic SAFE Investment Corporation Ltd., which yields ~$570B, has 65.8% of its assets in FDI and equity securities. If this new fund is real and anything like SAFE, it won’t be used to bail out ailing EU sovereigns. It will, however, look to buy European corporate assets on the cheap – something EU leaders haven’t been particularly in favor of (protectionism).
- We continue to hammer away on our view that Asia will not be there in size to help lever the EFSF or some other form of E.U. bailout. Zhu Guangyao, China’s Vice Foreign Minister in charge of European affairs, had this to say regarding the use of China’s $3.2 trillion in FX reserves: “China can’t use its $3.2 trillion in foreign exchange reserves to rescue European nations… Foreign reserves are not revenues. China can’t use its reserves to fund poverty alleviation at home or to bail out foreign countries… Now is not the time for China to have a contingency plan in the event a Eurozone country defaults on its debts or exits from the 17-nation single currency. The government has already done its part to help Europe, which has the wisdom and strong economic fundamentals to solve its sovereign debt crisis.”
- Jesse Wang, executive vice president of China Investment Corp, the nation’s sovereign wealth fund, recent comments affirm our conviction in the view that China will not be a source of dumb, unlimited capital to finance the Eurozone bailout, but rather a source of smart money looking for attractive investment opportunities in distressed real assets: “The fund wouldn’t be the main channel if China helps tackle the sovereign debt crisis... However, if during such a process there are good investment opportunities in Europe and if CIC’s investment helped the destination company or country to recover and developed the economy, that would be indirect support.” Commerce Minister Chen Deming shared those views in his recent remarks: “While China has always been supportive of Europe’s rescue efforts, these will mainly depend on the euro zone itself… China will definitely be a part of any help offered by the global community… We are willing to further reform and further open our market, but other economies must be more open to us in return.”
- In China, Gao Xiqing, president of China Investment Corp (the country’s sovereign wealth fund) had this to say regarding the potential of them reallocating assets to aid in the Euozone bailout: “When we talk about international investments, we must consider whether they serve our interests… We can’t say that we’re a generous nation and we can help you at whatever economic costs to us.” Additionally, Jin Liqun, chairman of the board at China Investment Corp, had this to say as well: “China cannot be expected to buy the highly risky bonds of euro-zone members without a clear picture of debt workout programs.”
- Two Chinese officials reiterated our view that China is unlikely to take part in bailing out Europe as a source of uninformed, unlimited capital. Zhang Tao, director of the international department at the PBOC suggested that China needs further details regarding the options for bailing out Europe: “At present there’s no specific plan that people have clear understanding of,” he said. Zhu Guangyao, vice finance minister, had similar remarks regarding the EFSF: “There’s no concrete plans yet so it’s too early to talk about further investments in these tools.”
- Chinese Vice Finance Minister Zhu Guangyao confirmed our belief that China would not be a source of “dumb capital” for the EFSF, publically demanding more details about the “technicalities” of the fund. Additionally, China Investment Corporation (sovereign wealth fund) Chairman Jin Liqun said that “Europe is not really short of money” and publically challenged the European populace to “work harder”, “longer”, and “be more innovative”.