Tuesday, December 28, 2010

China support of EU - political and business sense

China stated that it will provide "concerted action" to help the EU with stabilization. It is using its financial muscle to buy bonds and serving as a form of lender of last resort. It will provide stabilization "if necessary". It has already stated that it would support Portugal during a recent state visit by President Hu Jinto. Prime Minister Wen Jaibao stated earlier that China would support the Greek bond market.

This financial policy makes perfect sense since the EU is the largest trading partner of China and it will get more for its money in terms of yield relative to holding US Treasuries. China also wants a lifting of the arms embargo and change in status to "market economy" from the EU.

This form of financial statecraft has been used by other countries for decades so it should not be surprising that China will use its cash horde to buy EU bonds at the right time especially if there is the belief that in the short-run these bonds will be money good.

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