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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?

 

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Thu, 01/13/2011 - 09:04 | 872550 Popo
Popo's picture

Straight out of Goldman's playbook.

Thu, 01/13/2011 - 09:13 | 872563 zaphod
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.

Thu, 01/13/2011 - 09:21 | 872576 Richard Weed
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.

Thu, 01/13/2011 - 09:26 | 872583 Spitzer
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.

Thu, 01/13/2011 - 10:18 | 872764 youngman
youngman's picture

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

Thu, 01/13/2011 - 12:16 | 873137 Ahmeexnal
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. 

Thu, 01/13/2011 - 17:08 | 874281 Old Europe Avan...
Old Europe Avant-Garde's picture

+1

Thu, 01/13/2011 - 09:06 | 872553 westboundnup
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. 

Thu, 01/13/2011 - 09:24 | 872580 jus_lite_reading
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.

Thu, 01/13/2011 - 09:42 | 872637 AnAnonymous
AnAnonymous's picture

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

Thu, 01/13/2011 - 09:08 | 872556 doomandbloom
doomandbloom's picture

can i apply for chinese citizenship?

Thu, 01/13/2011 - 09:16 | 872571 David99
David99's picture

Marry a Chinese girl

Thu, 01/13/2011 - 09:27 | 872581 doomandbloom
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...

Thu, 01/13/2011 - 09:46 | 872652 malikai
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.

Thu, 01/13/2011 - 10:19 | 872768 youngman
youngman's picture

luv u long time.....

Thu, 01/13/2011 - 11:27 | 872972 Common_Cents22
Common_Cents22's picture

 

happy ending!

Thu, 01/13/2011 - 12:21 | 873155 Ahmeexnal
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.

Thu, 01/13/2011 - 10:04 | 872711 chinaguy
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.

Thu, 01/13/2011 - 11:01 | 872873 ZakuKommander
ZakuKommander's picture

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

Thu, 01/13/2011 - 09:49 | 872667 Dr. Engali
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.

Thu, 01/13/2011 - 11:18 | 872938 longjohnshorts
longjohnshorts's picture

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

Thu, 01/13/2011 - 09:09 | 872557 Bigger Dickus
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!

Thu, 01/13/2011 - 09:32 | 872591 WestVillageIdiot
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. 

Thu, 01/13/2011 - 13:28 | 873365 Missiondweller
Missiondweller's picture

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

Thu, 01/13/2011 - 09:47 | 872655 AnAnonymous
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.

Thu, 01/13/2011 - 09:11 | 872560 Bigger Dickus
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?

Thu, 01/13/2011 - 09:22 | 872562 Chappaquiddick
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

Thu, 01/13/2011 - 09:28 | 872586 bobert
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.

Thu, 01/13/2011 - 11:52 | 873034 Chappaquiddick
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!

Thu, 01/13/2011 - 09:13 | 872564 David99
David99's picture

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

China is a winner

Thu, 01/13/2011 - 09:38 | 872614 WestVillageIdiot
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.

Thu, 01/13/2011 - 09:57 | 872687 tmosley
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).

Thu, 01/13/2011 - 10:16 | 872759 fajensen
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!

Thu, 01/13/2011 - 09:16 | 872569 LongSoupLine
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

Thu, 01/13/2011 - 09:26 | 872582 jus_lite_reading
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.

Thu, 01/13/2011 - 09:33 | 872597 bobert
bobert's picture

DIm outlook for the US......

Thu, 01/13/2011 - 09:51 | 872672 AnAnonymous
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.

Thu, 01/13/2011 - 10:35 | 872807 LongSoupLine
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.

Thu, 01/13/2011 - 09:17 | 872572 Dr. Gonzo
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. 

Thu, 01/13/2011 - 09:40 | 872625 ZEITGEIST
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 ....

Thu, 01/13/2011 - 09:40 | 872626 WestVillageIdiot
WestVillageIdiot's picture

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

Thu, 01/13/2011 - 10:28 | 872786 Arius
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. 

Thu, 01/13/2011 - 10:51 | 872846 Dr. Engali
Dr. Engali's picture

Gold doesn't go up. Fiat comes down.

Thu, 01/13/2011 - 09:17 | 872573 KTS
KTS's picture

Clever girl...

Thu, 01/13/2011 - 09:21 | 872577 Bigger Dickus
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.

Thu, 01/13/2011 - 09:28 | 872584 jtmo3
jtmo3's picture

I assume you're being sarcastic?

Thu, 01/13/2011 - 09:31 | 872589 Bigger Dickus
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.

Thu, 01/13/2011 - 09:35 | 872606 bobert
bobert's picture

And...how do you really feel?

Thu, 01/13/2011 - 09:43 | 872640 Bigger Dickus
Bigger Dickus's picture

Like nailing Margaret Brennan.

Thu, 01/13/2011 - 10:24 | 872777 bobert
bobert's picture

Understand that.

Thu, 01/13/2011 - 11:18 | 872934 jtmo3
jtmo3's picture

But, have you not been paying attention for the last 6 months?

Thu, 01/13/2011 - 09:34 | 872587 Misean
Misean's picture

"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)."

Profits off paper...on paper...

BWAHAHAHAHAHAHAHAHAHAHAHAHHAHAHAHAHAHAAHHAHAHA!

Priceless!

Thu, 01/13/2011 - 09:33 | 872595 FB24601
FB24601's picture

It doesn't really matter to exchange one funny paper with another funny paper as long as the communists know it is the same game.

Their (the communist's) game is to work with other (nwo) majors to hold the funny paper scheme as long as possible before a collapse cannot be avoid.

As long as their interests can be aligned they can work together until it can no longer be.

Thu, 01/13/2011 - 09:37 | 872612 bobert
bobert's picture

Forexing for gains on a very large scale.

Thu, 01/13/2011 - 09:34 | 872600 TumblingDice
TumblingDice's picture

...isn't every financial transaction an attempt?

Thu, 01/13/2011 - 09:46 | 872635 FB24601
FB24601's picture

I think the communists are not winner but they are being "used" by them (nwo) to check and balance the western christendom (alleged notorious Albert Pike's letter).

It seems that the communists gained every upper hand in recent years but at the same time they are being pushed to aliged with the ME axis which will be used to confront with the "chosen nation" as everyone could expect.

When that will happen at first it will be opposing value chains of economies but who knows what will be next.

Thu, 01/13/2011 - 09:49 | 872666 Harmonious_Diss...
Harmonious_Dissonance's picture

Dollar breaks below 80 again, rangebound she seems!

Thu, 01/13/2011 - 09:52 | 872669 Artifice
Artifice's picture

Keep in mind that at the very least, Russia and China aren't dealing in USD anymore. Euro's(Euroes? nah) can flow to Russia with little resistance, so..

Bait and switch indeed. That banned commercial recently really summed it up, China will own the debt that nobody wants and everyone has to service. They're going to be the end beneficiary of any recovery that may happen in the next decade. US Default? Fuck no. The next world war lies over that bridge, and even if thats a 'civil' conflct there's still the standing army to deal with.

 

On the upside, Australia hit 5% employment last month. If you can afford to live here and put up with natural disasters, giant fucking spiders and drop bears - this is your place. At least China looks you in the eye here, and to think we got rid of a Prime Minister who speaks fluent mandarin.

 

Thu, 01/13/2011 - 09:53 | 872683 AnAnonymous
AnAnonymous's picture

China will own the debt that nobody wants and everyone has to service.

 

That is quite a big number, that.

Thu, 01/13/2011 - 10:03 | 872713 FB24601
FB24601's picture

They cannot push the joe six pack to fight if there is no national default or bankruptcy of some form, followed by military retreat, convert to "defensive" mode, internal chaos with some year of recovery and then being attacked by "terrorists" inland.

Thu, 01/13/2011 - 10:14 | 872756 Gunther
Gunther's picture

The way I read the FX market the someone tries to get rid of Dollars; the Euro is talked down all the time and that in the US some big states and municipalities are as broke as southern Europe gets swept under the rug.

The reality seems to be the opposite of the story told.

Thu, 01/13/2011 - 10:58 | 872861 Zeilschip
Zeilschip's picture

So the EURUSD is up at 1.3330 because China is selling EUR?? I wish I could deploy this strategy on my stocks...

Sat, 05/21/2011 - 00:44 | 1297613 kummar
kummar's picture

Are you really trying to say that these psychics are saying that AIG will survive and continue to be successful they way they were in 2000? Let me know what you have to say, please. My e-mail address is

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