Global News
European officials have quickly turned to Asia to help bankroll their plan to ease Greece’s debt obligations and prevent its fiscal collapse—but it won’t be an easy sell.
French President Nicolas Sarkozy called his Chinese counterpart, Hu Jintao, just hours after the deal, and the head of the euro zone’s bailout fund was heading to China and Japan, cap in hand. But both Asian powerhouses have made clear that while they are willing to help Europe, they will invest on their own terms.
Mr. Sarkozy’s office put out a statement saying he spoke with Mr. Hu to inform him of the euro-zone rescue package, and that the leaders also discussed the priorities for next week’s Group of 20 summit in Cannes.
The visit by Klaus Regling, of the European Financial Stability Facility, or EFSF, probably won’t bear fruit immediately, as China has stressed it would contribute only through the International Monetary Fund and in conjunction with Brazil, India and Russia, the other major emerging economies that together with China make up the so-called BRIC nations.
“China wants to be a responsible global citizen. It’s not impossible that it would put up some money to show its support. But clearly it would prefer to go through the multilateral route,” said Dong Tao, chief regional economist for Credit Suisse in Hong Kong.
European leaders secured a deal Thursday to reduce Greece’s debt and expand the firepower of the euro zone’s bailout vehicle, by four- or five-fold, suggesting it could provide guarantees for around €1 trillion, or about $1.4 trillion, of bonds issued by flailing EU member countries. The expansion could in part be funded by cash-rich emerging economies such as China.
China’s Ministry of Foreign Affairs on Thursday said China welcomes the conclusion of the euro-zone leaders’ summit and believes it will be conducive to the global market. Ministry spokeswoman Jiang Yu said China is willing to step up cooperation with Europe in various areas, but declined to comment on whether China would be investing in a special rescue fund.
Mr. Regling next week will visit Japan, which has already purchased around 20% of the debt issued by the EFSF and has signaled it may be ready to buy more. He is scheduled to visit Hong Kong and Thailand in December, and Singapore early in 2012, but it was unclear whether he would accelerate any of those visits in light of the EFSF’s pressing funding needs.
Japanese Finance Minister Jun Azumi on Thursday said Tokyo is ready to take measures to support Europe, but didn’t offer specifics as to what those measures would be.
“A stable Europe will be in the interest of our nation. From that standpoint, we will take necessary measures in a timely fashion,” Mr. Azumi said during a parliamentary debate.
A big investment by China into Europe’s bailout fund would mark a major change in the way China allocates its foreign-exchange reserves. China’s State Administration of Foreign Exchange allocates the lion’s share of its resources to low-risk—and low-yield—investments. While the low return has long been a source of frustration, the reserve administrators are wary of a political backlash should the national reserves post a significant loss.
China’s $400 billion sovereign-wealth fund, China Investment Corp., is fully invested and currently doesn’t have the resources to make a significant contribution to Europe’s bailout.
An investment through the IMF could take days or weeks to work out, and the Nov. 3-4 meeting of the G-20 industrial and developing nations in Cannes, France, would be the logical venue for progress toward that end, analysts said.
“There is an understanding that China is potentially part of the solution, but European officials cannot rely on China or other BRIC economies to be the ultimate backstop,” said Olivier Desbarres, head of foreign-exchange strategy Asia-Pacific at Barclays Capital.
Mr. Desbarres said the euro’s rally Thursday in Asia showed that markets see the euro-zone plan as credible, regardless of whether China participates. The euro climbed from $1.3903 before a deal was announced in Brussels, early Thursday morning in Europe, to $1.4016 late in the Asian trading day.
Still, Chinese leaders may calculate that helping Europe get back on its feet will win goodwill that could lead to payoffs elsewhere. China is seeking recognition from the EU as a “market economy,” a status that would help its chances of winning antidumping or subsidy cases brought against it.
It is also preparing a proposal for the Cannes G-20 meeting on allowing the yuan to join the euro, U.S. dollar, pound and yen as a component of the IMF’s special drawing rights.
European leaders have thus far rejected such a quid pro quo.
“China should ride to Europe’s rescue,” said Peng Junming, a former official at the People’s Bank of China who now serves as chief investment officer of Empire Capital Management LLP, an investment-management firm in Beijing. Mr. Peng sees it as a way to get a better return for the reserves.
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By: Martin Vaughn, Dinny McMahon and Bob Davis
Source: The Wall Street Journal, October 28, 2011
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