Does China Really Care About Europe?

02/23/2012 9:30 am EST


Jim Trippon

Editor-in-Chief, China Stock Digest

The headlines go back and forth between China being a key player at the table in solving Europe’s problems and China not wanting to get stuck in the Eurozone’s quicksand. But there’s more to the story, writes Jim Trippon of Global Profits Alert.

With the seemingly interminable drama concerning the Eurozone debt and particularly Greece, one of the backdrops has been that China’s name has periodically been invoked.

China’s been mentioned as everything from a potential financial savior, to economic lender of last resort, to a keenly interested bystander, to just about anything else you can imagine that has some financial import for Europe.

Almost daily, stories change regarding China’s potential role, or perhaps even its preference as far as how it wants to engage—or not—the Eurozone crisis. One day, it’s that the CIC gives a cold shoulder to Germany’s Chancellor Angela Merkel, another day it’s that China maintains it will keep its investments in the Eurozone. Then another day, there are stories that China will seek new investments to help Europe out.

So, China investors want to know, which, if any—or even perhaps all of these—are true?

The first thing we might point out is that China has been observant. Early in the days of the more hysterical global realizations of the extent of the Eurozone problem, with the PIIGS and especially Greece, some in Europe immediately jumped to the conclusion that China would be a prime candidate to help or bail out, depending on the level of candor.

Early on, however, China’s leadership in Beijing—while offering encouraging, even soothing words—wanted no part of positioning itself underneath the mess to catch what might be thousands or millions of falling knives, better known as sovereign debt. The suggestion that China soak up these questionable bonds was met with a consistent, polite, but firm no.

When there was some disappointment in Europe that China failed to immediately ride to the rescue, it was pointed out that of China’s $3.2 trillion in currency reserves, estimates of perhaps as much as $800 billion of that, or one quarter, are invested in Europe. This apparently included sovereign debt and other instruments. China had no wish to expand this to include what by any measure would have to be considered high-risk investments.

Words Of Support
China has consistently supported Europe in its struggle by word, if not deed. Although cynics would point out that China, as any world economic or political power, often says one thing and does another, it was clear China was taking a wait and see attitude.

Recently, China’s central-bank governor, Zhou Xiaochuan, reiterated his country’s supportive words. As quoted in a recent Reuters article, Zhou said, "We strongly believe European countries can work together to handle the challenges. They are able to solve the sovereign debt crisis…The PBOC firmly supports the ECB’s recent measures to address the difficulties."

Although there were recent reports that some of the industrial companies in China would try to step up their business with Eurozone countries, this again was seen as more supportive talk that would be difficult to quantify in action, as the EU struggles on the verge of recession in many of its weaker member countries.

But there was talk that was linked with substantive action beyond encouraging words. Zhou did say that China "will not cut the proportion of euro exposure" in its reserve investments.

Thus, the $800 million or whatever amount of currency reserves China has already committed will stay. That’s no small thing; China isn’t yanking away what is already a pillar of support.

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More to the point, Zhou added that China’s investment continued in Europe with an eye toward safety, liquidity, and commercial return.

And that last point, the one about investing for commercial return, is at the heart of things—and rightly so. China, although it has been accused by critics of "buying up the world," is keenly interested in investing in hard assets, real assets in Europe, assets that would make a profit. This is consistent with its policy that has been unfolding long before the Eurozone crisis.

Its state-owned companies have been encouraged to venture overseas to expand their asset bases and to make quality investments. China’s energy companies and power companies have been doing so.

The State Power Grid company has been investing in overseas power companies, such as in Portugal and the Philippines. China’s major oil companies are investing in Canada and Australia.

Now, there may be more European opportunities. What drives this? China’s need for resources and its desire for profits. Nothing untoward there.

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