China's financial clout felt in Europe

The 16-nation euro currency zone is beset by fissures between strong economies such as Germany and weaker ones such as Greece, Ireland and Portugal, which risk being engulfed by historic levels of government debt.
Washington Post Foreign Service
Tuesday, January 11, 2011; 2:04 AM

LONDON - Could China be Europe's white knight?

Europe's roiling debt crisis is deepening once again, with analysts fearing that cash-strapped Portugal and perhaps far-larger Spain might soon follow Greece and Ireland in needing a massive international rescue. But speculation among traders that cash-rich China might step in and buy hard-hit European bonds, along with Chinese officials suggesting that Beijing would keep supporting the euro, helped the currency claw out a gain Monday after briefly hitting a four-month low against the dollar.

The market's reaction underscores the global clout of Chinese cash, with the mere suggestion that Europe might enlist Beijing's aid having a calming effect on some investors.

China is already embarking on a charm offensive in Europe, seeking to strengthen its diplomatic and economic footprint in the region.

Influential Vice Premier Li Keqiang landed in London on Monday, inking auto, energy and other trade deals worth more than $4 billion with British officials. Those agreements came on the heels of equally lucrative stops last week in Berlin - Chinese demand has been driving Germany's export-led recovery - and Madrid.

The Chinese reassured harried Spanish officials that they would buy billions more in government bonds, according to Spanish news reports. Analysts say buying Spanish bonds could help restore investor confidence in Spain's ability to avoid what could become the largest financial rescue in years.

"This has been a freezing winter for Europe, not only in terms of the heaviest snow for decades . . . but also as a result of the debt problem that has beset some countries," Liu Xiaoming, Chinese ambassador to Britain, wrote in the Telegraph newspaper last week. Nevertheless, he added, "cold Europe is feeling the warmth of the Chinese breeze. China is doing what a Chinese proverb says about 'sending charcoal in snowy weather.'"

Early Tuesday, Japan said it planned to support European efforts to contain the euro zone debt crisis, according to Bloomberg News. Japanese Finance Minister Yoshihiko Noda told reporters in Tokyo his government was preparing to buy more than 20 percent of an upcoming issue of bonds aimed at funding the bailout of Ireland.

China has a strategic interest in shoring up the euro, which has fallen sharply against the dollar in recent weeks, as debt fears have rippled through the 17-nation euro zone. China's own currency is pegged to the dollar, so the fall in the euro against the U.S. greenback has made Chinese exports more costly in the European Union, which trades more with Beijing than even the United States.

European officials have also been seeking China out. The finance minister of Portugal, which many analysts say is on the brink of needing a bailout, traveled to Beijing last month to pitch the nation's troubled bonds to Chinese leaders. And rumors spread through European capitals Monday that China may be set to make a major purchase of Portuguese debt when Lisbon conducts an important bond sale Wednesday.

"It is going to be a test," said Jane Foley, senior currency strategist with Rabobank, the Dutch financial institution. "China needs to put its money where its mouth is. Is it going to make a big bond purchase, or is this just talk? That's what the markets need to know."

Yet few analysts think that even Chinese cash will restore long-term investor confidence in Portugal. German magazine Der Spiegel and other publications have reported that Portugal is under pressure from Germany and France to accept a bailout that could be worth up to $100 billion.

Portugal has repeatedly denied it needs aid. But so did Ireland and Greece right before both nations did an about-face and humbly requested assistance from the E.U. and the International Monetary Fund. Like Greece, the government in Portugal has dramatically overspent and is heavily in debt - albeit not as deeply. Investors also have little faith in Lisbon to rein in its expenses and avoid defaulting on its bonds without the aid of its larger neighbors.

Confidence in Portugal is so low that investors are demanding interest rates of about 7 percent to buy its bonds, a figure that most analysts agree is unsustainably high.

"European nations seem to want Portugal to accept a bailout soon to calm markets and avoid more contagion in the bigger economies" such as Spain and Italy, said Giada Giani, European economist for Citibank in London. "We do think Portugal will need a bailout."

China, however, may prove more helpful to Spain. Spanish newspaper El Pais reported last week that China was preparing to buy about $8 billion in Spanish government bonds as part of an effort to help address Europe's debt crisis. Spain's next big sale of debt is set for Thursday. Still, analysts said China would probably need to put up substantially more to have a serious impact on market sentiment.

Although Li did not publicly confirm the report, published during his visit to Madrid, he said China would continue to "play an active role" in finance markets, and that China would continue to support the euro.

On Monday, it was Britain's turn to win China's attention. In addition to deals with Jaguar Land Rover and BP, Li agreed to loan the Edinburgh Zoo two pandas, Tian Tian and Yuangguang, for 10 years.

"Together, today's deals will safeguard 700 jobs in the United Kingdom and are estimated to have the potential to create many more," Nick Clegg, Britain's deputy prime minister, said in an address welcoming Li. "The agreements we have seen today . . . [demonstrate] the momentum we are building together towards even stronger relations."

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