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Dispatch: China Considers Buying European Debt

MIN READJan 3, 2011 | 21:54 GMT

Analyst Marko Papic examines speculation that China is considering buying European outstanding debt as the Chinese vice premier prepares to visit Europe. Editor’s Note: Transcripts are generated using speech-recognition technology. Therefore, STRATFOR cannot guarantee their complete accuracy. Chinese Deputy Premier Li visits Spain, Germany and the United Kingdom from Jan. 4 to 12. His visit is fueling speculation that China is considering buying a considerable portion of European outstanding debt in 2011. Li's visit to Europe is significant because he is somebody who is speculated to be the successor to the current premier, Wen. Li's visit also comes as China continues to consider diversifying its purchases of U.S. Treasury bills to other sovereign debt as well, and Europe certainly has ample amount of sovereign debt. In terms of what China actually gets out of buying European debt, there really are four different issues. The first is of course the diversification argument, which we already mentioned. The second is the idea that it could make smaller deals with specific countries. Earlier in 2010, it says that it would continue to purchase Greek debt and this led to successful purchases of several assets in Greece that Beijing hopes will be really a beachhead into Central and Eastern Europe. The third issue is protectionism. The Chinese are hoping that their willingness to consider purchasing some distressed debt in Europe will lead to a more relaxed attitude by the Europeans when it comes to trade protectionist attitudes. Only recently the Italian EU commissioner, Antonia Tajani, said that he would like to see the EU set up something akin to the U.S. Committee on Foreign Investments, an agency that would essentially review whether or not a particular European asset should be sold to a foreign bidder, and he specifically claimed that Chinese purchases of various assets in Europe have to do with purchasing essentially Europe's technology at a low cost. Finally, China would like to see the EU rescind its embargo on arms trades with Beijing. This is something that a number of European countries have wanted to see ended for while; the French of course stand to gain considerably from potential arms sales to China. However, the likelihood of anything really moving the Europeans in that direction is very low. The U.S. pressure on its allies within the European Union — such as the United Kingdom, but also other NATO member states — would be extreme, and therefore it is quite unlikely that the Europeans will be able to get the unanimity necessary to overturn the embargo. Thus far there is no evidence proving that the Chinese bought a considerable amount of European debt in 2010 or that they're willing to purchase more in 2011 other than public statements. However, public statements may be in the end all that the Europeans are looking for from Beijing. Mere mention that the Chinese are thinking of putting some portion — even a small portion — of their $2.7 trillion worth of foreign exchange behind European debt is worrying for investors thinking of shorting the euro in 2011, and it may stay the investors at least for the first quarter of 2011 in terms of betting against the euro. It will therefore be interesting to watch in the first quarter of 2011 whether the Chinese public statements of support have any measurable impact on interest rates during bond sales or whether there is greater demand for European bonds, especially of distressed countries like Spain and Italy. Furthermore, it will be interesting to see whether Li's visit actually brings any return on potential Chinese investments.
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