Debt Crisis: Beijing is no white knight
14 September 2011
The announcement by Italy of a flow of Chinese capital rushing in to support the Italian economy has raised hopes of Beijing riding up to rescue the euro. We must be wary of false hopes, however, writes La Repubblica. China is a prudent and discriminating investor.
Will the Chinese buy up stakes in the public energy giant ENI – or the public electricity company ENEL? Can they acquire a share of the industrial group Finmeccanica – or the port of Genoa? Buy up shares in Unicredit Bank in exchange for taking part in long-term treasury bill auctions, and so fill the vacant seat of the departed Muammar Gaddafi?
To grasp what is behind these varied scenarios – or if these rumours are coming from Italy itself – we must reconstruct the map of Chinese investment around the world, Beijing's financial strategies, and how the investments intertwine with the geopolitical interests of the world's number two economy.
Two types of adjustments are underway in how China is managing its capital reserves: diversification away from the dollar and into other currencies; and a shift of government securities into blocks of shares in industrial companies – where possible, those of strategic importance to China. These adjustments are graduated, and at no time can they be permitted to upset the “stability of the global economic system.”
Those who are quick to interpret the Rome-Beijing contacts as a “vote of confidence” of the Chinese government in the solvency of Italy are much mistaken. The head of Spain's government, José Luis Zapatero, fell into the trap when he prematurely announced massive purchases of Spanish debt securities by China that later were revealed to be rather modest.
Fleeting impact on the markets
In the midst of the systematic disaster of 2008, China's strategists were called on by the United States to act as a “white knight”, and China responded. At home, though, furious controversy on the wisdom of the gallantry followed. At the worst time, with U.S. stock indices tumbled to historical lows, Chinese managers were accused by their political leaders of having wasted national resources to bring a relief to U.S. banks that was as risky as it was useless. Today, the outcome of this operation is less negative, but the scars linger as a cautionary tale to Beijing.
The players in Beijing are two financial behemoths. First, there is the “parent company”, the government body that, like a true ministry, looks after the monetary reserves of China's central bank. These reserves are the commercial assets China has accumulated in global trading over the years, and they are the most sizeable in the world: 3,200 billion dollars [2.3 trillion euros]. The acronym of the State Administration of Foreign Exchange – “SAFE”, as in both “secure” and “strongbox” in English – is an efficient synthesis of its investment philosophy.
Just as speedily as China's central bank reserves have been replenished by new commercial assets, the SAFE has invested, in the first half of this year alone, $ 275 billion [€ 200 billion]. That means that, if it wanted to, SAFE could buy up the entire Italian debt coming to maturity by the end of the year. But that would not exactly be very “safe” – which is why the central bank continues to reinvest most of its reserves in U.S. treasury bonds.
As for the ongoing diversification out of the dollar and into other currencies, the central bank in Beijing prefers – to stay on the “safe” side – German bonds and Japanese debt securities, all considered solid investments. The repeated announcements of massive Chinese buy-ups of assets of Mediterranean countries have always proved exaggerated. In July 2010, for example, rumours of support for Spain had only a fleeting impact on the markets. Instead of saving the country, SAFE had made only a modest purchase of 500 million euros worth of ten-year bonds.
A sign of the changing times
In October 2010, Chinese Premier Wen Jiabao visited Athens, and there too hopes of large-scale purchases of Greek bonds proved fleeting. The only actual purchase was a stake in the management of the port of Athens by the Chinese logistics giant, Cosco. This episode illustrates another dimension of the Chinese strategy: the more aggressive one. The main player behind it is the China Investment Corporation (CIC), Beijing's sovereign wealth fund. The CIC's resources still come from the same source, the monetary reserves of the central bank.
But it is the CIC, with its greater freedom of action and more diverse functions, that is spearheading the penetration of China into the global economy. Its status gives it a “market orientation and purely economic-financial goals”. As a company, the CIC is accountable to its shareholders – which would be the government in Beijing. It cannot be ruled out therefore as a Trojan horse to tackle strategic objectives, such as acquiring advanced technology, management expertise, setting up bridgeheads in promising markets or in activities where China still needs to sharpen its competitive edge.
Geographically, China's direct investments remain focused on the United States, at 42 percent, followed by Asia, at 30 percent. At just 22 percent, Europe trails in third place. Europe is also an example of how China is pursuing diversification of its industrial assets. Profiting from the crisis of 2008, the Chinese managed to wrest control of Volvo from Ford Motor Company.
The next summit of the BRICS states (Brazil, Russia, India, China and South Africa), which is to be held next week in Washington and which should discuss possible support for the eurozone, is a sign of the changing times. Today, it's with the emerging powers that capital is to be found. Guido Mantega, Brazil's Minister of Finance, has declared that the eurozone crisis is “the agenda of the day.” The world is well and truly upside down. Brazil and Russia, synonymous only yesterday with “payment default”, are now being chalked up with China on the list of potential “white knights”. Provided they want to play this gallant role, and that the rewards we offer are to their liking.