China is not a white knight

The last day or so has seen a string of wild rumours about China buying European bonds.  A hilarity in the whole thing is that in another report, Giulio Tremonti, the Economy Minister, complained that Asian investors just won’t buy bonds because the ECB isn’t buying enough.  So are Chinese really buying?  Probably.

There is something worth pointing out here.  China isn’t the noble white knight of Europe.  They said they would buy Greek bonds, and that has led nowhere as far as the Greek sovereign debt crisis is concerned.  But, one might still be unsurprised by Chinese bond buying because it is a part of thei exchange rate policy.

Although Chinese yuan has been appreciating against the US dollar since mid-2010 quite steadily, the yuan has actually been depreciating against a few other major currencies, including the euro, Japanese Yen, Swiss Franc, etc.

Yes, appreciating the yuan against the US dollar has been making Chinese exports look less competitive in $US terms, but it has still been very competitive for other countries because their exchange rate has not appreciated (in nominal terms).  That is in part due to the weakness of the $US over the same period of time against other currencies.

The trouble is, if the $US dollar strengthens and if Chinese maintains its “soft peg” then that would mean that now the yuan is really appreciating against other currencies.  Europe, being another big trading partner, with its currency somewhat in trouble, might be problematic for China.  China may be able to tolerate a gradual small appreciation against the $US, but if the $US jumps, that would be much less tolerable from their export sector’s perspective.

So if China does buy European bonds and to prop up the euro, it is purely a mercantilistic behaviour, not a noble white knight.  From peripheral European countries perspective, what they need is probably a weaker euro, not stronger.  The strength of Germany has supported the euro exchange rate a great deal, but the strength does not help for the peripheral countries which are uncompetitive while at the same time unable to devalue their currency.  With Chinese buying and propping up the euro, it will not help these indebted countries to perform necessary structural reform nor deficit reduction.

So, despite China’s intense rubbishing of the US public finances, they have not stopped buying bonds.  And despite even greater danger of default, the Chinese may still appear to be interested in European bonds. Go figure.


  1. “China is a poor country with only $4,000 per capita income. To talk and think about China to rescue countries with $40,000 per capita incomes is ridiculous.”

    -Yu Yongding, a Chinese top economist and former member of the central bank’s monetary policy committee
    via TBP

    China can do no right in Zarathustra’s eyes.

  2. One of issues the chinese are interested in is getting the EU arms embargo lifted. Will not be an irrelevant consideration in negotiations. Keep an eye on that ball.

    • Just what the world needs – Everyone muscling up!

      Oh well I suppose there will be more steel needed for that:)

  3. There are NO white knights in international affairs. But Italian
    bonds do have something behind them – the Central Bank’s
    2500 tons of gold. And China NEEDS more gold, if its’ currency
    is to have credibility as a means of settling international trade.
    The USD has no such backing, nor will it ever again. Its’ 8000 tons belong to the US Treasury, not the Fed, and it has proved
    TWICE that it will withdraw gold from currency backing
    whenever it chooses. The Euro may look sick, but it is the
    USD which is dying as a global reserve currency, its’ military notwithstanding.

  4. Just give it time and everyone will realise that China was never a white knight about anything. Before long China will need to be worrying about their own economy because everything they built was shortcutted so they have pay trillions to fix, SOE’s go broke because of all the bad loans, the under the table loan market goes down the tubes and the uprising of the people becomes a massive problem. Mark my comments this will happen.