Sunday, September 18, 2011

Can China and Italy Dance In Harmony? (An American Perspective from China)

Can China Rescue Italy?

SEPTEMBER 17, 2011
On Wednesday, I went on Bloomberg TV to talk about the rumors that China might step in and buy Italian bonds, in effect rescuing the EU economy from the latest stage in its ongoing debt crisis.  Later in the week, Fareed Zakaria argued that by using its vast ($3 trillion plus) foreign currency reserves to bail out Europe’s faltering bond markets, China could play a key role in stabilizing the global economy and, in the process, show that it is a “responsible stakeholder” worthy of a larger leadership role.
My own take is somewhat different.  In my interview on Bloomberg (which you can watch here), I made the following points:
  • China can no more “bail out” Italy (the world’s 8th largest economy, with an outstanding public debt of $2.4 trillion) than Europe can.  What it can do is provide liquidity in a market that is undergoing a severe crisis of confidence, helping Italy buy time as it looks for a longer-term way to reassure investors.
  • However, it’s far from clear that China is prepared to do even that.  China has talked a great deal about using its currency reserves to project “soft power,” but when it comes to pulling the trigger, it has been extremely cautious about putting its money anywhere besides the safest and most liquid instruments.  On his last few trips to Europe, Premier Wen made promises that China would step in and buy Greek, Spanish, and Portuguese bonds, but there’s little evidence that China has actually weighed into these markets in any sizable way.  This Tuesday’s Italian bond auction, in which demand from buyers was pretty weak, certainly didn’t suggest any big buying spree by China.

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