Words ought to be a little wild, for they are the assault of thoughts on the unthinking
- J.M. Keynes

Thursday, 2 February 2012

Spectre of Chinese rescue dragon raised again


The headline reading bots bought everything in sight before one could say "China considering deeper involvement in EFSF".

This is not the first time that China is supposed to be saving the Eurozone through its infinite foreign exchange reserves ($3.2 trrrrrillion). Only this time it is slightly more credible as the statements have actually been made by the Chinese (and by Premier Wen Jiabao no less).

First, let us put the statement in context. Chancellor Merkel is in China on a visit. Wen Jiabao is hardly going to say to an invited and honoured guest: "Sorry, your problem. We're not going to invest a penny in what we consider a hopeless case. Will use the money to buy up resources in Africa and Latam instead."

Then let us analyse the statements one by one.

1. "China “is investigating and evaluating concrete ways in which it can, via the IMF, get more deeply involved in solving the European debt problem through [European Stability Mechanism/European Financial Stability Facility] channels,” Mr Wen said." (My emphasis)

This is not a change in attitude. They have always maintained that they are willing to increase their IMF commitment to help Europe. The reasons for choosing to fund through the IMF are twofold. One, they get senior creditor status. Two, their investment is levered through other nations' contributions to the IMF. They have been clear that if they buy, they want the super senior tranche of this European CDO.

2. "European officials said they believe Beijing has clearly changed its position and more concrete terms of any Chinese contribution are likely to be discussed in two weeks at a delayed EU-China summit."

This is a typical liberal and creative interpretation of Chinese statements by "European officials". The record is still held by a "Spanish finance minstry official" who talked about Chinese buying SPGBs (Spanish government bonds). It was denied by China within an hour causing a sharp reversal to the bond rally.

3. "Mr Wen said it was increasingly “urgent” that a solution be found to the European debt crisis and he called on the international community to co-operate towards that end."

Again nothing new in this. I'd like to see someone say (Simpsons or South Park doesn't count): "It's not really that urgent. Find a solution. Or not. Doesn't really matter."

All in all, the Chinese have reiterated their position more politely. The IMF will "invest" (using the word very loosely) and they will invest through it. Nothing has changed. The only thing to be careful about is to not impute causation and start trading/investing on the wrong reason. The market is in a "risk on" mode mainly because of Draghi's drugs and an unwind of excessive bearishness. So watch that space to figure out when to exit short-term long risk positions.

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