There’s only one thing more humiliating for the eurozone than China buying up its
sovereign bonds — and that is if China doesn’t. To this end, head of the EFSF Klaus Regling, currently on a sales run in Asia, has said that some of the bonds of his newly souped-up
SPIV may be denominated in yuan. Such a move would further enhance
the renmimbi’s status, increasing the possibility of it supplanting the dollar to become the world’s reserve currency. And, even then, China may not be enticed.
With apparently no recognition of the irony, European leaders are saying that the euro rests on ‘solid fundamentals’ while considering switching some of their national debt to another currency to make it more palatable. Yesterday, Italy’s embattled PM Silvio Berlusconi had an outburst in which he described the euro as a ‘strange currency’ that ‘has convinced nobody’ — perhaps his most lucid statement in months. Ten-year Italian paper was auctioned off only after yields were pushed to 6.06 percent; their highest level since the euro was created, showing that investors still have grave doubts about the EU rescue plan unveiled early on Thursday.
That’s the kind of market excitement China — and Brazil and Japan, both of who have indicated that they’ll support the SPIV — can look forward to if they become investors in euro fixed-income. But will they bite? So far, Beijing has been playing down its role in a bailout, with vice finance minister Zhu Guangyao saying that his country wants to wait for the structure of the €1 trillion SPIV to be ‘extremely clear’.
Fair enough. Everyone is waiting for the structure of the investment vehicle to be “extremely clear”. The IMF may be involved in a big way, or it may not. (George Osborne has pointed out that the Fund exists to support countries, not currencies.) And Beijing itself will have to approve the denomination of any eurozone debt in yuan.
But one thing is emerging with super-sharp clarity: the cards are all in Beijing’s hands. True, it’s already a big holder of euro debt and the EU is China’s biggest trading partner, so it has an interest in the eurozone doing well. But if it does put money in the SPIV, it will be able to make demands such as having a greater say in IMF, or even EU, affairs. The world’s largest Communist state may also ask the EU to recognise it as a ‘full market economy’, with the trade benefits that entails. It may, with an eye to its own disgruntled workforce back home, ask the eurozone to dismantle its welfare state.
And what if China decides not to shore up the SPIV? Then it would watch as the eurozone’s economy struggled for the next decade or so, while its own fares relatively better, rebalancing the scales of global power.
It looks increasingly as though Beijing is in that enviable situation known as ‘win-win’.
Comments