Is China's European Rescue Just A Big "Bait And Switch"?

Tyler Durden's picture

Something interesting happened on the way to China's bailout of Europe. After recently China stepped up its Eurosupport rhetoric, and even put a token amount of money where it mouth is, €1.1 billion in directly placed Portuguese bonds specifically, and who knows how much in secondary market purchases, many of the clouds over Europe, and specifically the Euro, have been lifted temporarily, resulting in a modest jump in the EURUSD from just under 1.29 last week to nearly 1.32 today. Which makes sense: after all the EU is China's second biggest trade partner, and as a habitual importer, China needs the EU's currency as strong as possible to preserve its imports. Yet what is odd, is that over the past 24 hours we have received numerous notifications that it is none other than Chinese banks that have been selling the EURUSD! Which makes one wonder: is China's European "rescue" just one big bait and switch distraction?

Keep in mind that it was just announced that Chinese FX reserves swelled to an unprecedented $2.85 trillion, jumping by a massive $199 billion in Q4, the biggest amount on record. And of course, this is not all USD denominated. In fact, according to estimates, the euro accounts for 25% of the total amount, or about $710 billion. Seen this way, it suddenly becomes far more clear why China is much more focused on the EURUSD, and why every marginal change in the pair actually has a far greater impact on the country's asset allocation decisions.And China is the best when it comes to strategically allocating FX reserves.

Here's the math: assuming roughly €510 billion in EUR-denominated holdings, just the last 5 day jump in the EURUSD from 1.29 to 1.31 means that the USD value in a static pool of €-holdings has increased by about $11 billion (on paper). But here's the kicker: it is not on paper, and if the rumors are true, China is actively converting EUR holdings to USD. It appears that the mid-1.31 range is one appropriate exit point. So from an IRR standpoint, China invests €1.1 billion in Euro peripheral bonds knowing full well that the biggest backstopper is the ECB, in essence letting the country frontrun Europe's taxpayers. And in return it gets a marginal improvement in its FX holdings to the tune of $10 billion. In other words, every 100 pips improvement in the EURUSD results in a ~$5 billion boost to the USD valuation of EUR-denominated holdings. And if the latest €1 billion investment allowing the country to "buy" $10 billion in FX gains is any indication, China sure knows what it is doing.

Furthermore, with it allegedly actively selling EURs as a result, it appears that the country is in effect betting against Europe, and is continuing to reduce its 25% EUR allocation, with the USD as a beneficiary.

This is certainly not Euro-positive, but it means that every time the EURUSD drops below 1.30 China will ramp up the rhetoric of its European support, and do an occasional €1-2 billion direct investment, which allows the country to offload another several billion in EUR at a higher fixing.

To those who see this as a great bait and switch, you are not alone. Yet this is nothing more or less than perfectly permitted FX-warfare, in a world in which countries like China with a pegged currency will do all everything in its favor to preserve exposure in whatever currency it finds strongest.

The only question then remaining is at what new low threshold level in EUR-denominated FX reserves will China say enough and pull back the rhetoric... and its wallet?

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Popo's picture

Straight out of Goldman's playbook.

zaphod's picture

The question is what happens when they hit $4T in FX reserves and fiat paper starts to go. No country has ever come close to this, even on an inflation adjusted basis. No one, not even China or GS, can know how it will finally play out. Either way they are sure to be suprised in the end.

Richard Weed's picture

Erratum:

The Euro area is China's number 1 trading partner, not number 2.

The US was surpassed as China's biggest market (aka dumping ground) a full 3 months ago.

Let us all stop buying cheap Chinese krap.

Spitzer's picture

The answer is yes, it was a bait and switch. Contrary to popular belief, the Euro is in better shape then the USD. Europe is a net creditor.

youngman's picture

At least they are cutting expenses...we are just printing money.....

Ahmeexnal's picture

 

"Europe is a net creditor."

 

Actually, that has absolutely no relevance.

Once again, this is not about money.

It's about power. 

westboundnup's picture

China is known for being savy when it comes to formulating long-term national strategy.  Assuming the accuracy of the article above, what are they thinking?  I've always wondered how "in tune" the PRC is with peak oil and what its strategic response will be. 

jus_lite_reading's picture

I was thinking along the same lines...

When I first saw China getting on the big horn about "supporting the EURO" I knew it was not out of generosity or goodwill. Their intentions are well known.

AnAnonymous's picture

Really? They look more like peeps trying not to burn their fingers with hot money...

doomandbloom's picture

can i apply for chinese citizenship?

doomandbloom's picture

:) I am considering that...

 

hmm..settling down in a quiet Chinese village..eat chinese food...learn a bit of kung fu, taichi....teach a bit of english...get chinese medicine when i grow old...

malikai's picture

Sorry, but marrying a Chinese girl does not grant one Chinese citizenship. It does, however put one in a position to hedge domestic risk against foreign risk. This is a smart play IMO. But in reality, one should marry who you love. Lest you want to find yourself hating your life and wife in 10 years, which would be terrible if you're also living in a foreign country where you do not speak or read the local language.

Ahmeexnal's picture

If after living 10 years in a foreign country you have not learned to speak or read the local language, you should not blame anyone but yourself for your life's misery.

chinaguy's picture

Um, you might try just visiting a "nice quiet Chinese Village" first before making any life chances....not as idyllic as one might hope.

ZakuKommander's picture

Especially if you're going to be labelled a "foreign devil."  Which for most Westerners is a deserved appelation.

Dr. Engali's picture

Good luck with that. There are 120 men for every 100 woman in China. Leaving 24,000,000 single horny men for one gigantic army.

longjohnshorts's picture

Okay, so marry a Chinese guy. Or, become his concubine.

Bigger Dickus's picture

Either way, seeing the markets magically levitate makes me want to kick myself for having closed my trading account a year ago and piled into precious metals and cash. It's the cash part that bothers me. Those motherfuckers!

WestVillageIdiot's picture

"It's the cash part that bothers me."

 

I think there are millions and millions of Americans that would envy your hardship.  Be glad you have a cushion and enjoy your life.  A lot of people are sitting on a razor's edge. 

Missiondweller's picture

Yep, especially the 15 million unemployed, many of which, are also underwater on their homes.

AnAnonymous's picture

Depends on what reason you left the markets.  If you left them to chase for what is declining faster than cash, then good hunting in sight.

If you got out just to get out, that is another story.

Bigger Dickus's picture

Something in the grand scheme of things is fucked. The correlation between eur/usd and the European markets that has been active for the last two years has broken up in the last two weeks. Could this mean Brian Sack is losing control?

Chappaquiddick's picture

Here's a fancy question:

 

What is the dollar value of all of the currency (all currencies not just dollars) currently in circulation on the Earth?

 

Thanks

 

 

OH - BTW: http://online.wsj.com/article/SB10001424052748703889204576078421845404258.html?mod=googlenews_wsj

bobert's picture

Interesting queston. Sorry I don't have a quick answer for you.

Check the Federal Resere site for total US currency in circulation and then divide that by the US to global GDP ratio to get a rough idea.

Maybe your question leads to another question about the prospect of global inflation. This is the issue of the year really. Are we going to inflate, deflate, or both?

And I have a question for you. Is it possible for silver as priced in US dollars to decline over the period of a month while silver as priced in Australian dollars goes up during the same period of time?

Best regards.

Chappaquiddick's picture

Trick question??

Ans YES - as the dynamic depends on the pair rate of the usd:aud

 

Back to the first question - perhaps the best estimate might be global GDP.

 

Thanks. - No problem, you're welcome! - Well thanks to you too - Cheers!

David99's picture

China is a very clever country and will take advantage of the bad situation in Europe /USA

China is a winner

WestVillageIdiot's picture

"China is a very clever country......China is a winner"

Yes, I always admired the cleverness of their Cultural Revolution.  Those little red books were ingenius.  Slaughtering each other and dying of famine was also brilliant.  I especially loved the tales of regular citizens trying to make steel in their backyards.

The Chinese ascendancy has taken place during the biggest credit bubble in the history of the world.  The collapse is nowhere near complete.  Let's see what strange ideas they fall prey to as we go back into a 2008 type spiral.  Despotism and China go hand in glove.  Time will tell how much they have really won.

tmosley's picture

I love how you can't tell the difference between the decline from communism of the Cultural Revolution, and the boom caused by industrialization.

Fact is, they will prosper according to the level of their capital accumulation, and according to the restraint their government puts on spending.  Their government currently spends 20% of their GDP, whereas ours spends 40+%.  Clearly, they are in a much better position than we are.  Of course, the US became a superpower by spending less than 2% of GDP on government, save in times of war, when that spiked up to between 5 (foreign wars) and 10% (civil war).

fajensen's picture

I think that the Chinese generally are morons!

I have the misfortune of working on minor project deliveries to Chinese contractors.

*Everything* is done brute-force with hundreds of people sitting on-site for weeks in shit-hole countries, like f.ex. Sudan, waiting for the higher-ups to order people about or for the local Sales Team, a.k.a. The Gods, to derail the entire project schedule because they happen to need input for a presentation ToMorrow. As soon as orders are given everybody jumps and start shouting at each other; then everyone contacts everyone they know to say "make work faster" - at the same time no-one, event hough they are perfectly capable, dares to do even the simplest tasks, like fitting a missing power cable. Better to wait 20 hours for orders and then scream for 3 hours in meetings (and on every communication channel available) because the schedule has now slipped the 20 hours and some of us gweiloo have planes to catch and visa's that expire.

The visa's reminds me that *everything* has to be done in the shoddiest way possible; They like people to use tourist visas "because cheaper" which is really neat except that if you have an accident, the insurance will not cover it due to Fraud and if you get nicked in customs with a suitcase full of equipment with a tourist visa ... In many countries that makes you a spy and you are lucky if you get out with just a casual beating!

China will cook off nicely once their asset bobble - the largest in the world - blows up. I can just imagine the reaction of all these totally driven, me-me-me-oriented people, who's parents sold their organs to put them through school so they could become Someone, when their "bone" is snatched away in front of them.

They might even be pissed enough to pop a nuke on someone, seriously!

LongSoupLine's picture

I'll say it again, "Sun Tzu".  This is the culture the global system is up against regarding China.

"The opportunity to secure ourselves against defeat lies in our own hands, but the opportunity of defeating the enemy is provided by the enemy himself." - Sun Tzu

jus_lite_reading's picture

The EU/US/UK took China for a fool by betting on "mutually assured destruction." Big mistake. China knows they will win; the west will lose.

bobert's picture

DIm outlook for the US......

AnAnonymous's picture

"The opportunity to secure ourselves against defeat lies in our own hands, but the opportunity of defeating the enemy is provided by the enemy himself." - Sun Tzu

 

You read too much in the situation. Few people know what securizing oneself means in the present context.

As neither the US or the EU will collapse, China is not able to look for that.

Looks like they are caught in the present game, forced to consume with no other reason than consuming (game imposed on the world by the US)

Their money has to circulate somewhere somehow. No other reason than that at present times.

LongSoupLine's picture

"read too much into it"?

That's as 101 a strategy as you get in warfare.  You are too embedded and entwined in the lie to see this perhaps.

Dr. Gonzo's picture

I wouldn't know the answer to your rhetorical question author. I'm stupid. I just buy gold and silver coins. Unrelated to this story but still interesting... a mining expert on CNBC this morning said it now costs $1000 to pull gold out of the ground. Wow. It seems like it was just yesterday that it only cost $300 or $400 to do it. Wonder how much it will cost next year to pull out of the ground. sidebar. I bought an oz of gold for $1000 about a year ago thinking I was being taken advantage of. Guess i was wrong about that. 

ZEITGEIST's picture

mining expert from where..the Mining School of CIA Disinformation...all the 4Q results will be out for the miners...bet it will be around 550 ....

WestVillageIdiot's picture

$700 of that is to bribe local governments.  Bribery inflation is a bitch.

Arius's picture

you have to thank Goldman, JPM and the rest of the crew for keeping the price low; blame the chinese for the price going up.

strange isnt it - you would think the opposite is true. 

Dr. Engali's picture

Gold doesn't go up. Fiat comes down.

KTS's picture

Clever girl...

Bigger Dickus's picture

Euro way up and stocks down? Gentlemen, the big bad dump has arrived. Expect HFT computers to overheat and explode and the three POMO hipsters to stab themselves seven times in the back, shoot themselves several times in the head and jump out the window.

jtmo3's picture

I assume you're being sarcastic?

Bigger Dickus's picture

The part about the POMO hipsters? Yes

The part about the market tanking? No. I genuinely believe the market will sell off over the next few days. I traded since I was 16 and closed my account last year to get into metals and cash. This market is a lie and anyone long this crock of shit deserves to lose their ass.