Markets Ponder China Bailing Out Europe (Again)

♠ Posted by Emmanuel in ,,, at 12/22/2010 07:16:00 PM
OK, OK, so I am using the term "bailing out" in a very loose sense: For instance, China has not quite said that its continued patronage of US debt in the wake of the financial crisis is specifically to bail out America. Rather, it's always couched in diplomacy-speak such as preserving "stability" in the global financial system as a certain Yankee diplomat-beggar would put it.

I almost missed the clip above of LSE IDEAS' very own Niall Ferguson arguing that the Chinese should help bail out China on Fareed Zakaria's GSP programme. (Despite what our school paper says, he does work here.) This theme has been a continuing one: former IMF Chief Economist Simon Johnson even went so far as to suggest its headquarters should be in Beijing if and when the Chinese become the largest shareholders. Somewhat less far-fetched, China has indeed voiced support for the idea of diversifying its holdings by purchasing sovereign debt of troubled eurozone members (which ares still denominated in euros).

So it is that newswires are abuzz with news that the Chinese are once again making noises to similar effect:
China has promised to take further “concerted action” to support European financial stabilisation, including continuing to buy the bonds of countries at the centre of the sovereign debt crisis, according to senior European officials. The officials, who declined to be named, said Wang Qishan, a Chinese vice-premier, had given assurances that China would step up support for European stabilisation efforts “if necessary”. Mr Wang made the pledge during the third annual China-EU High Level Economic and Trade Dialogue, held in Beijing on Tuesday...

In addition, Klaus Regling, the head of the eurozone’s €440bn ($577bn) bail-out fund, said China had shown enthusiasm for bonds issued by his agency, tasked with raising a sizeable chunk of the funding for the €85bn Irish bail-out. The EU is China’s biggest export market, with two-way trade valued at $434bn in the first 11 months of this year, and Beijing has a strong interest in supporting regional stability. “From the European point of view we appreciate the support of China for the European and international effort to safeguard financial stability in Europe,” said Olli Rehn, European Commissioner for Economic and Monetary Affairs.
Two things, however: so the Chinese have already voiced support for troubled eurozone economies, but that hasn't done much to reduce their interest rate differentials over that of German debt. Also, further support is likely to be tied to the EU moving on two longstanding grievances China holds with the West over lifting its designation as a "non-market economy" earlier than 2016 as agreed to in its WTO accession and limitations to its purchases of European arms:
Mr Wang’s comments boosted the euro’s value against the US dollar, but China’s public support for Greece and Portugal over recent months has not prevented their bond yields remaining near record highs. European officials said that although China had not explicitly linked its bond purchases to any specific issues, Beijing asked in the talks for the EU to grant it “market economy” status and lift a long-standing arms embargo.
That said, I gather that market commentators are taking somewhat increased risk appetite as a result of expectations for China to backstop Europe. Once more, it's interesting how much market participants now attribute to China's actions despite limited evidence of it buying distressed euro-denominated sovereign debt.