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Saturday 26 May 2012

Renminbi to the rescue

Italy is turning to deep-pocketed China in the hope Beijing will help stave off its financial crisis by making “significant” purchases of Italian bonds and investments in strategic companies, reports the FT. If true, this could help allay fears that Greece’s debt fiasco will engulf the entire eurozone; indeed, FT’s article late yesterday helped the euro and Wall Street stocks to recover, and European equities opened higher this morning. Once again, the EU crisis is helping cast Beijing in the role of saviour, even though the amount of Italian debt China will buy – if it buys any at all – is unclear.

In July last year, China bought Greek bonds; this January, it purchased Spanish ones and in June, Hungarian. These European nations sold their sovereign debt to Beijing not without reluctance – the FT says Italian finance minister Giulio Tremonti, one of the architects of the current reported China deal, has written extensively in the past about his worries of a “reverse colonisation” of Europe by China. Still, with Greece’s chances of default in the next five years now soaring to 98 percent, and Moody’s expected to downgrade the credit rating of France’s top banks later this week, Europe can’t afford to be too picky about any source of welcome liquidity.

Also in the FT, Arvind Subramaniam makes a canny observation about how Beijing goes about its economic affairs: “The process is micro-managed, interventionist, and enclave-based: not a day seems to pass without some foreign entity or country being granted greater but selective access…” Subramaniam is talking about China’s currency policy – his piece is entitled ‘Coming soon: when the renminbi rules the world’ – but to some extent this applies to Beijing’s softly-softly approach to becoming Europe’s creditor too. And just last week, China said it would back London as an offshore yuan trading centre – something British business leaders had long been lobbying for. Beijing has previously granted this favour, piecemeal, to Hong Kong, Singapore and Taipei.

In online service Financial News, Rachel Shoemaker recently pointed out that China hand-picks its eurozone deals. Everything is calibrated so it gets something in return, in a form of pragmatic bartering par excellence. For instance, in exchange for an undisclosed amount of Hungarian bonds and a $1.4 billion credit line, Hungary agreed to become China’s logistics hub in Europe and establishing a European distribution centre for technology firm Huawei.

“While China is certainly looking to achieve some political benefits in return for supporting the European Union, the country is much more focused on strategic investment than a wholesale rescue of the eurozone,” she adds.

There’s no doubt that by choosing the timing and presentation of its European ventures carefully, China is burnishing its own image as a kind of generous benefactor in times of need. Indeed, for all the hoo-ha, its role in European debt markets is still pretty much peripheral. The clamour may not quite match the clout. A research note by RBS this morning cautions that, even with a China deal, “overall conviction still remains low in credit markets given the magnitude of Europe's problems and poor secondary liquidity.”

But there’s no doubt that amid the EU’s chaos, China is staging, if not yet a political, then a PR coup.

More articles from: Clarissa Tan | this section

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