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China moves to prop up Europe's economy

The Asian nation pledges to buy billions of dollars' worth of bonds in European Union governments to restore confidence in the debt-ridden region. The EU is China's biggest trading partner.

January 15, 2011|By David Pierson and Henry Chu, Los Angeles Times
  • Chinese Vice Premier Li Keqiang greets Spanish King Juan Carlos in Madrid on a recent swing through Europe. In Spain, where unemployment hovers at 20%, domestic media reported that China had offered to buy 6 billion euros more in government bonds.
Chinese Vice Premier Li Keqiang greets Spanish King Juan Carlos in Madrid… (Andrea Comas, Reuters )

Reporting from Beijing and London — Growing into its role as a global economic power, China is pledging to buy billions of dollars' worth of bonds in European governments to help restore confidence in the debt-ridden region.

The move is the latest evidence that the giant Asian nation is developing ties with strategically important trading partners and expanding its influence in areas where it has long played a minor role.

In what European media have dubbed a charm offensive, Chinese Vice Premier Li Keqiang was all smiles on a recent swing through the continent, assuring the Germans that their economy was complementary to China's and praising the Spanish as good friends.

He also dispensed plenty of largess, promising to aid the souring economies of Spain and Portugal — pledges that were seen as more than just goodwill.

If Beijing wants its economy to keep flourishing, China can't afford the collapse of the euro any more than the nations that use it. The European Union is China's biggest trading partner, and China is the EU's second-biggest export market.

That adds impetus for helping the Spanish consumers who buy Chinese-made clothes and other exports or the German firms that provide Chinese manufacturers with the sophisticated equipment they need.

"There are mutual benefits behind China's diplomacy where both sides can win," said Huo Jianguo, president of the Chinese Academy of International Trade and Economic Cooperation, a think tank under the Ministry of Commerce.

China already has significant holdings of European debt. In Spain alone, it owns 43 billion euros ($57.3 billion) in that country's debt — about a fifth of existing Spanish bonds.

On Thursday, Spain easily raised 3 billion euros ($3.9 billion) in a debt auction that was a key test of investor confidence, and Italy sold 6 billion euros ($7.8 billion) in medium- and long-term bonds. The offerings came a day after Portugal conducted a successful bond sale.

It wasn't immediately known how much debt China bought, but the nation wasn't alone. Japan, for instance, also has said it would buy European government debt.

Still, China's foray into the European crisis underscores the growing influence that Beijing's deep pockets play.

Portugal's finance minister, Fernando Teixeira dos Santos, met with Chinese banking and finance officials in Beijing last month to promote the sale of Portugal's debt. The heavily indebted country has resisted calls for an EU bailout despite record yields for its bonds — a sign of how risky investing in Portugal remains.

In Spain, where unemployment hovers at 20%, domestic media reported that China had offered to buy 6 billion euros more in government bonds. On Li's trip this month the two countries signed business deals worth more than $7 billion.

Alfredo Pastor, an economics professor at the IESE Business School of the University of Navarra in Barcelona, said China's intervention to help prop up Spain sent a strong signal to other investors that Spain was a safe bet.

"China has very deep pockets," Pastor said. "If you can see on the other side somebody who's willing to sustain the paper, then your urge to short it may be lower, [and that] may contribute to stabilizing the situation."

Experts warn, however, that China's largess alone is not large enough to resolve the worsening state of many European balance sheets.

"This can help on the margins, definitely, but that's not what's going to shift the balance," said Antonio Garcia-Pascual, chief economist for southern Europe at Barclays Capital in London. "While the Chinese announcement is welcome, it's not a solution."

Countries on the EU's so-called periphery, such as Ireland and Greece, in addition to Spain and Portugal, are deeply troubled financially. Reversing their downward spiral would require not only hundreds of billions of dollars but also new growth drivers to build the nations out of debt.

"It's a solvency crisis," said Michael Pettis, a senior associate at the Carnegie Endowment for International Peace and a professor at Beijing's Peking University specializing in financial markets. "And you can't keep borrowing yourself out of insolvency.

The stakes are far lower for China, which stands to gain a great deal from stronger political ties with Europe but risks only a small portion of its foreign reserves, which amounted to a record $2.8 trillion at the end of 2010.

Beijing has been trying to diversify its foreign holdings after being criticized both at home and abroad for sinking too much into U.S. Treasury bills. An estimated two-thirds of its investments are denominated in dollars, with the rest in Japanese yen and euros.

On China's wish list is an entree into European markets. The U.S. has often proved to be unfriendly territory, evidenced by failed bids by Chinese firms to gain inroads in oil and telecommunications.

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