China Ride's to the Euro's Rescue
American Secretary of State Hillary Clinton was reported to have remarked that it was difficult to negotiate with one's banker in reference to America's relationship with China. A large chunk of China's $3,000,000,000,000 of reserves is in dollars.
America's huge indebtedness provides China with an advantage in negotiations with the United States. Of course, the threat is double edged. One recalls the witticism: If you owe the bank $1,000,000 you do not sleep well at night, but if you owe the bank $100,000,000 the bank does not sleep well at night. China would forfeit a great deal of money if it called in the US debt, but the creditor-debtor relationship still provides China with a psychological advantage.
Now Europe is about to receive a taste of the same relationship. China has offered to purchase €4-€5,000,000,000 of Portugal's sovereign debt. Chinese Vice Premier Wang Qishan (tipped to become China's next Premier when the next generational change occurs in the Chinese leadership) said that China supported the actions taken by the European Union and the International Monetary Fund to respond to the euro-zone debt crisis.
Wang made these remarks at a Chinese European Union economic summit. The result was a brief rally in the Euro's exchange rate. The euro has lately been under pressure as the rating agencies have threatened to downgrade the credit status of EU members. Portugal was on the credit ratings chopping block of Moody's and the Chinese announcement indicates that Lisbon may now avoid an EU bailout (portending further contagion to other countries in the Euro zone).
Members of the Euro zone became increasingly conscious of the contagion when Moody's threatened to downgrade the once gilt-edged AAA French bonds unless France reined in its deficit. France was heavily invested in Portugal, Spain and Greece - countries contending with economic crisis. French banks were therefore considered heavily exposed. Actually Moody's was merely reacting to what was already taking place in the financial markets as the cost of refinancing France's debt is now higher than for the Czech Republic or Chile.
By playing the gallant financial knight riding to the rescue, China gains vis a vis Europe the same leverage it enjoys over the United States. Wen said at the post summit press conference "It is important to oppose all forms of protectionism with concrete actions." Translated into simple English this means that the European Union would be best advised not to proceed with anti-dumping measures against China or to pressure China to reevaluate its currency.
One does not set conditions to the Chinese banker. The Chinese, by shifting some of the late foreign debt into Euros, can also signal the United States that they have alternatives to dollar holdings. In a period when the Sino-American rivalry appears to be heating up, this can prove to be a useful card in the diplomatic game.