European leaders have been meeting with Chinese officials, as well as with other BRIC (Brazil, Russia, India and China) leaders.
With the eurozone debt crisis dominating the news, French banks being downgraded and the euro currency at a low against the dollar and other currencies, it isn’t surprising that the Chinese and other emerging economies are perceived as the lenders of last resort.
But will China, with foreign reserves of about $3.2 trillion (and growing by at least $500 million per year), buy European sovereign debt? Although China holds some of its foreign debt in euros (believed to be more than 20 percent), it isn’t in a rush to buy more. It is obvious that there will be no “free lunches” as China and the other BRIC countries will demand more from the Western economies.
A few months ago, there was a debate as to why a European was appointed as head of the IMF (French Finance Minister Christine Lagarde) and not a Brazilian or Mexican. Some of the BRIC candidates were better qualified and more experienced. Chinese officials have agreed to support European sovereign debt if and when the eurozone officially recognizes their country as a market economy.
What countries like China want is a strong euro that can afford to buy its imports while maintaining a weak yuan. It is unclear if the other emerging economies will buy significant amounts of euros. Russia has about 45 percent of its foreign reserves in euros (estimated at $543 billion); the Brazilian sovereign wealth fund is rather small (estimated at $352 billion); India has about 20 percent of its $320 billion in foreign currency reserves and doesn’t intend to increase its proportion in euros.
The limitation of a coordinated BRIC move toward buying euros leaves Europe at the mercy of China. But China has pointed out that it isn’t really interested in buying sovereign debt but real assets. The Chinese Investment Corporation (CIC), which has about $300 billion, started buying real assets, and not in public-listed companies which it did initially.
In 2007 when the CIC was created, it bought shares of U.S. private equity fund Blackstone and Morgan Stanley. CIC is smarter and now focuses on investing in real estate and natural resources like energy. CIC’s latest moves include a 3 billion euro investment in French utility and energy concern GDF Suez.
At the beginning of 2011, China supported the troubled economy of Spain by buying a significant percentage of its large energy group Repsol for $7.1 billion.
China will continue supporting Europe as its largest export market but will opt for smarter investments. Investors can learn from CIC and also opt to invest in “real assets” like real estate and energy companies.
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