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Oct. 31, 2011, 12:00 a.m. EDT
China advocates Europe borrow in renminbi
Commentary: If you want a friend in Beijing, get a dog
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by David Marsh, MarketWatch
BEIJING (MarketWatch) — In the wake of last week’s new deal on European debt, China is serving up a steely reminder to Europe: you may have to start borrowing in renminbi to gain a sympathetic hearing from the world’s largest creditor.
Already officially enshrined by U.S. Secretary of State Hillary Clinton as bankers to the world’s biggest debtor the Americans, the Chinese have no wish to become, too, a last-ditch lender to the Europeans. The idea of renminbi borrowing has been put forward by Beijing advisers and officials as a way of lowering Chinese foreign-exchange risks caused by further exposure to Europe — and also of using the Europeans’ latest discomfiture to advance China’s international monetary-policy agenda.
If this happened, it might pave the way for the U.S. Treasury eventually to issue renminbi-denominated paper — a momentous moment in world monetary history .
Europe's week ahead: ECB, G20 meetings
Investors are awaiting an interest-rate decision from the European Central Bank and the meeting of the Group of 20 leading economies in France next week.
Klaus Regling, the head of the European EFSF rescue fund, was in Beijing on Friday to display to his Chinese hosts the latest selection of wares from Europe’s bargain-basement bailout bazaar. During his visit, when he gave a lecture at Tsinghua University, Regling did not rule out renminbi funding in future.
It was a mistake for the European authorities to give the impression that Regling’s visit was part of a post-summit funding spree. Publicity surrounding his journey to Beijing immediately after the Brussels summit was bound to raise expectations to unmanageable heights.
The Chinese were already unamused by last week’s European Union postponement of regular high-level consultations because of the elongated EU summit. Allowing headlines to develop — however unrealistically — that Europe expects Oriental largess to flow in the wake of the bailouts was not a clever move.
Regling somewhat unwisely commented that China had been “a good, loyal” buyer of EFSF bonds in the past. Confusing day-to-day bond market sentiment with human characteristics like loyalty appears to suggest a fundamental inability to understand what markets are all about: making money.
Unfortunately that’s exactly what investment in Greek bonds has not done for those holders luckless enough to be sitting on 50% losses on the face value of their purchases. Never in the field of bond market write-downs has one country’s credit standing — Greece’s — been verbally defended by so many, to so little avail. China is not likely to forget that when the next crowd of European sovereign-debt salesmen hits town.
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The Chinese have shown impatience with Europe’s stop-start approach to the European debt crisis. Like other large investors throughout Asia, they are surprised that travelling Europeans expect them to buy bonds from hard-pressed European governments when the institution they have expected to be the lender of last resort, the European Central Bank, balks (for whatever reason) at staunching the rise in Italian bond yields.
Certainly, any expectation by Regling — who was at pains to point out that his trip represented “one of my regular visits” to China — that his foray will result in new bonds of financial friendship looks likely to go unrequited. One has to adapt only slightly Harry Truman’s phrase: “If you want a friend in Beijing, get a dog.”
In a telephone call on Thursday to discuss this week’s G20 summit in Cannes, President Nicolas Sarkozy explained the latest bailout measures to President Hu Jintao. The Chinese leader said he hoped they would “help Europe stabilize financial markets, overcome difficulties and push forward economic recovery and development,” according to the Chinese Foreign Ministry’s website. Well, that’s all right then.
Chinese officials say that, rather than considering further bilateral lending to Europe through the byzantine assortment of additional EFSF instruments, China is far more likely to agree financing via additional multilateral agreements with the International Monetary Fund. These would provide the Chinese with more leverage over conditionality, expose them to fewer risks and also allow the emerging-market economies as a bloc to lay down the law more effectively with regard to the Western nations that still dominate the Fund.
Chinese observers say the Beijing government is under more pressure than ever before from an alert Internet-savvy public to resist cash appeals from errant European governments when millions of ordinary Chinese are struggling with worrisome social, economic and environmental conditions and even abject poverty.
One well-connected Chinese source points out that, during the Asian currency crisis, Koreans sold gold to help the government, whereas the Greeks go on strike. He underlines that, even if Europe does get more vendor finance from creditor countries, China is not expecting Europe dramatically to increase its higher value imports from China . “We export a lot of labor-intensive products, we get dollars in return, we buy euro bonds, and they decline. We’d be better of investing in developing countries’ infrastructure or buying high-tech European companies.”
David Marsh is co-chairman of the Official Monetary and Financial Institutions Forum.
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siteleader 1 day ago
ThoughtfulMonkey 1 day ago
China is betting that they can allow the Yuan to float against the USD (and reduce energy cost inflation) so long as they have enough contracted debt to substantiate a strong Euro/Yuan currency link - preventing the possibility of loss of Chinese exports to Europe.
This is not China being evil, it's just the Chinese being ... more
pioneer 19 hours ago
enemynumberone 18 hours ago
traderjoeny 5 hours ago
US is already third world. most in gilded mansions don't know it.
indianajohn 8 hours ago
Tessarajan 6 hours ago