China Lays Out Conditions Under Which It Will Bail Out Europe; Does Not Want To Be Seen As "Source Of Dumb Money"

Tyler Durden's picture

Back in September we noted that "Wen Jiabao Says China Willing To Extend Help To Europe... For A Price" the price in question being that, among other things, the EU should recognize China's market economy status, and to split Europe with the US on the topic of Chinese currency manipulation. Naturally, being the biggest import partner for China's goods, the topic of providing vendor financing to Europe has always been a critical one. Well, as was made clear overnight a key part of the European rescue effort is to get China on the same page, and to have it allocate capital to the EFSF. As the FT reports this may have happened, although with more or less the same conditions that China delineated 6 weeks ago. Only this time China has all the leverage. According to the FT: "China is very likely to contribute to the eurozone’s bail-out fund but the scope of its involvement will depend on European leaders satisfying some key conditions, two senior advisers to the Chinese government have told the Financial Times." So what are the conditions: "Any Chinese support would depend on contributions from other countries and Beijing must be given strong guarantees on the safety of its investment, according to Li Daokui, an academic member of China’s central bank monetary policy committee, and Yu Yongding, a former member of that committee." Obviously, Europe will promise the latter. As for the former it could be a tad problematic because as observed previously Brazil has voiced against rescuing Europe in the form of non-IMF participation. But there are more conditions: "It is in China’s long-term and intrinsic interest to help Europe because they are our biggest trading partner but the chief concern of the Chinese government is how to explain this decision to our own people,” said Professor Li. “The last thing China wants is to throw away the country’s wealth and be seen as just a source of dumb money.” Alas, that is precisely how the entire world sees China. As for the final condition: "He added that Beijing might also ask European leaders to refrain from criticising China’s currency policy, a frequent source of tension with trade partners." And this is how you declare political check mate and shut up all voices that threaten to protest against mercantilist policies. And since it is only a matter of time before China will have to rescue the US, we hope Senate enjoys the time remaining in which it can debate whether or not China manipulates the CNY. That time is about to end.

From the FT:

Klaus Regling, head of the EFSF, was due to arrive in Beijing late on Thursday for discussions with senior Chinese leaders on whether and how much China might contribute. Nicolas Sarkozy, the French president, telephoned his Chinese counterpart Hu Jintao a few hours
after the summit ended to discuss the rescue plan but there was no immediate announcement on any Chinese involvement.

European leaders agreed that the EFSF would explore two plans to increase its remaining firepower from about €250bn to €1,000bn. One would be to offer investors insurance on selected government debt while the other would create a special fund in which the International Monetary Fund or countries such as China could invest.

With $3,200bn in foreign exchange reserves, roughly a quarter of which are believed to be held in euros, China could be willing to contribute between $50bn and $100bn from the reserves to the EFSF or a new fund set up under its auspices in collaboration with the IMF, according to one person familiar with the thinking of the Chinese leadership.

“If conditions are right then something a bit above $100bn is not inconceivable,” this person said.

And here is how China gets one step closer to internationalizing its currency:

One condition China might ask for is that its contribution be at least partly denominated in renminbi, which would protect its investment against currency fluctuations. China would buy euro-denominated bonds but repayments would compensate for any changes in the value of the renminbi, which has appreciated nearly 20 per cent against the euro in the past three years.

Needless to say, Europe is not too happy with the economic give for political take...

Reflecting the unease in Europe, the head of Germany’s industry association, said he feared Chinese help could “come at a political cost”. Hans-Peter Keitel told the FT: “Asking a non-eurozone nation to help the euro would the the other nation the power to decide the fate of the single currency.”

This is spot on, and at this point, Europe has absolutely no trump cards left. It is entirely at the mercy of China. Or so the market thinks.

What is ironic is that when the next European bail out has to happen, and China is indeed seen as an actual source of dumb money, political tensions will finally shift over from the developed world to "surplus positive" one:

"Any mis-steps in helping Europe could cause problems with domestic public opinion – the Chinese people will watch very carefully what their own government does,” Prof Yu said. “European leaders also must have a clear plan of what to do and they must show China they have the political will as well as the support of their own people; if we see protests and chaos all the time, then China won’t have confidence in Europe’s political ability.”

And so China enters the wacky and wonderful world in which Europe will promise the moon and the stars with the only backstop strategy that one of hope, more hope and nothing else.

We are confident this will all end the way good money chasing after bad always does. But for now, the surge continues.

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papaswamp's picture

The new landlord cometh....

Ancona's picture

I think that China will be bailing herself out pretty soon. With the rest of the world falling down around them, who will buy those cheap exports? The U.S? Greece? Spain?

reality is a bitch, and the piper always has to be paid. When your own growth is dependent upon building ghost cities and second rate high speed rail lines, there comes a point when even your own people begin to question the value of building simply for teh sake of building.

junkyardjack's picture

China needs to bail out the rest of the world so it is around to bail them out in 2 years.  As long as they all don't go down at the same time the game can continue

Hard1's picture

"We are have you through the balls"    (Wen Jiabao, circa 2011 - Editor note: probably referring to the fact that China had all the power in the negotiation)

dlmaniac's picture

China must have asked for PIIGS' gold behind the door in exchange for bailout money.

trav7777's picture

Europe is going to say no and print.

The political costs are lower for the latter.  Tell China to fuck off and close your import markets.

China is nationally operating at nearly zero profit, which is why they have to be increasingly bellicose.

caconhma's picture

Do you really expect that Greece, Italy and Spain will become hard-working, honest, and productive?

Good luck. Nothing has changed. They will take money, promise everything Chinese ask for, and default.

China has learned nothing from Iraq, Libya, Pakistan, etc., As soon as China usefulness is gone (work hard for nothing), China will be treated no better than Saddam or Qaddafi. 

malikai's picture

LOL. Good luck with that.

Buck Johnson's picture

Yep, they probably said that with this gold we will give it back once our investment is paid back in full.  Everyone is getting pulled in to this impossible scenario.  There is no way that Greece can pay back any of this, eventually they will default.  As the article said, all this is doing is throughing good money after bad.

thefedisscam's picture

You should really educate yourself more, about how much China's export is imports from other Eastern Asian partners, such as Japan, S. Korea, Mongolia, HK, and Taiwan!

When China exports decline, China suffers LESS than those partners! Most of those partners importing their own parts to China, and use ONLY cheap labors in China. Just like Apple products!

Plus, 65%+ of ALL China's imports to the U.S. are by U.S. OWN big corporations. Asking who will suffer more?



Smiddywesson's picture

When China exports decline, China suffers LESS than those partners!

Perhaps over the short term, but those corporations have no loyalty to their country of origin and play a shell game with profits.  Closing off trade with China would kill it, and fancy arguments about how that would hurt multi national corporations, resulting in even more damage to the US and EU economies ignores the huge sucking sound coming out of China as those companies repatriate industries to service these economies.

You should really educate yourself more, about how much China's export is imports from other Eastern Asian partners, such as Japan, S. Korea, Mongolia, HK, and Taiwan!

Maybe you should educate us on how China can have a viable economy with no outside customers.  Your argument is globalization is irreversible.  Just watch.

derek_vineyard's picture

Fucking shit. Something isn't right.

espirit's picture

Agreed.  What about the source of "dumb money" from the USSA?

If China owns EuroLand, we're frocked.

Nascent_Variable's picture

China simply can't be the perpetual "dumb money" source.  As they said themselves, their people won't stand for it.

China is one of the most xenophobic countries the world has ever seen.  How the hell is their government going to explain to legions of rural farmers, living in essentially Third World conditions, that they need to bail out Greek pensioners?  The press can be stifled, but never completely silenced.

As soon as the PIIGS fail to honor their bailout deals, Chinese mistrust of foreigners and the government's fear of a peasant revolt will put an end to any hope of China as the go-to bailout country.

thefedisscam's picture

"China is one of the most xenophobic countries the world has ever seen.  "

LOL. All I can say is that you know NOTHING about China!!

Smiddywesson's picture

China has to be xenophobic you troll, with 292 different languages, you have to have a "barbarian" boogey man to hold all those different people together in that crap hole of an internment camp you claim is one country.  That's why you booted out Google, you can't stand the truth.

Now run along and make those sneakers, your 16 hour shift is about to start.

LFMayor's picture

They don't explain shit to their farmers man.  They TELL them.  Once.  And then it gets done.

yesindeedy's picture

1. Farmers are self sufficient, the equivalent of homesteaders.

2. Most of the press outlets are government run, so there's no need to stifle press.

3. Another day, another China expert. Why don't you go on a talk show circuit?

yesindeedy's picture

Anybody who's opened a history book should be able to see that China's mistrust of foreigners is well founded.

>Portuguese land in China, leave almost empty handed, but steal some local children to sell as slaves

>British land in China, start selling opium


papaswamp's picture

China may be already bailing itself out. That is the problem with closed books, we have no idea. They can print as much as they want and claim anything they wish. 

Unfortunately, in Europe's despiration, they will accept anything....even sell their soul (or most likely property). 

trav7777's picture

doubtful...Germany holds cards, China really doesn't.  Maybe over the PIIGS but they aren't going to extract any concessions from the krauts.  Germany will VETO anything which materially hurts THEIR mercantilist and protectionist economy.  Bank on that.

CTG_Sweden's picture


China should probably increase wages near the coast even more and accelerate the process in which Chinese export companies move inland. Perhaps these companies should also move to countries like Vietnam, Cambodia and Laos? 

China is a country which in theory can produce almost everything they need except raw material domestically. Why not cut imports as regards things they can produce domestically rather than bother about exports of cheap junk? If China did that I think their economy could grow by 20 % per year rather than by 10 % per year. 20 % is not impossible. The South Korean economy grew in that rate for a few years.

Furthermore, the Chinese leadership would be less vulnerable to major uprisings if people actually could see that they made more money and improved their living standard. My impression is that the Chinese leaders are somewhat stupid when they are so anxious about being able to export cheap junk which requires riot prone cheap slave labour. People generally prefer democracy and freedom to dictatorship. In the long run, I suppose that a non-elected government needs more growth and more prosperity than democratic countries in order not to be toppled. But non-elected rulers seldom seem to realize the need for prosperity until it is too late. Perhaps that is due to the fact that the leaders don´t feel the pressure to improve people´s living standard since they can not lose any elections?


mjk0259's picture

They are now the largest car market. 30 years ago, lucky to get a bike so the standard of living is increasing pretty fast. Couple Chinese tell me house prices are almost the same as US in many areas. Actual income must be a lot higher than reported for a large part of the population because I don't see how that is possible considering they are supposed to have per capita income $3,000/year and have to put down huge down payment.

GiantVampireSquid vs OWS UFC 2012's picture

Reality is a bitch, Chinese bailouts are bottom up bailouts for the most part.  Building ghost cities is straight out of Keynes book.  Bailing out bankers is straight out of the red shields book.  Burn the books, fuck the system, it's all bullshit.  

jdelano's picture

I can't remember the last time I ever had such a leaden feeling of disgust in my stomach.  Anybody giddily celebrating this obscene equity orgy cleary does not comprehend the magnitude of what is unfolding in front of our eyes today, and how grim the future has just become.  I'm going to throw up now.  

jowenchrist's picture

The Slave Masters are at work - time to go all in -


Fibz's picture

The banking industry is like a body having spasms after the brain is dead.

lemonobrien's picture

you take shit too seriously.

Unprepared's picture

As a sign of good faith, shipment of a new Freedom Statue is on its way to Shanghai.

Mr. Jiabao also received a free lifetime golden membership to Berloscuni's Bunga Bunga club.

matrix2012's picture

ha ha ha.. the junks are simply worthless... find other stupids for the sell-out!

Bazinga's picture

The new landlord giveth and the new landlord is smart enough to be in a position to take it away...

HelluvaEngineer's picture

Right.  You'll pay up and shut up.

FunkyMonkeyBoy's picture

China is dumb to have anything to do with this s**t. They hold the strongest hand at the poker table and are yet look like they're going to fold, while Europe and the U.S. hold a pair of deuces and king high, respectively.

Hearst's picture

China would be wise to demand physical Gold as collateral or swap FX reserves for bullion.  That would be their strongest move possible and demonstrate to the EU that they are serious about not being the source of 'dumb money.'  Indeed the EU would be the dumb ones to exchange bullion for paper.

LawsofPhysics's picture

They will, and then the terms of WWIII will be discussed.  Not in public of course.

NotApplicable's picture

As reasonable as it sounds, that would basically be a declaration of war.

Hearst's picture

That declaration would originate from the EU not China.  China is the one bailing out the EU.  The EU as condition to recieve China's funds must dance to the tune they play.  The EU (and US) have the economic weak hand.  The US amassed all its Gold from the world not from being holding a weak hand but a strong one.  China will do the same.

CTG_Sweden's picture

Another solution is that the EU prescribes that all imports of oil must be paid in euro rather than USD. Then the EU can print all the money they need. Of course, that would take less printing in the US, and the US would probably not like that.

If the west want to topple the Chinese ruling party, I think that it would be easier to see to that underpaid slave labour riot. The Chinese leaders seem to be folly enough to think that it is so important to be able to export cheap junk to the west. Therefore, it is important to see to that wages don´t rise to fast. But why not use all the money they got in order to build factories that can produce more goods for their consumers and produce these goods efficiently enough so that workers can get wages that won´t make them riot? Remember how Henry Ford in 1913/14 more than doubled his workers pay by increasing their pay-cheque to 5 dollars a day. In 1914, a Ford model T sold for $500. 100 days of work = a new Model T. And that was almost 100 years ago. Perhaps some of the investments could be accomplished by buying equipment in Europe and the US? That would create some growth in the west too. To me, that seems as a better solution than lending money to European politicians, countries and banks that they can´t control but are controlled by others than themselves. If they buy factory equipment and tooling instead of lending Europe money, they can be sure that they get something in return.

Smiddywesson's picture

China would be wise to demand physical Gold as collateral or swap FX reserves for bullion.

They are coordinating their margin hikes, so you can bet all parties know the future value of that bullion.  How likely is it anyone is going to let go of their gold?  Not going to happen.

reTARD's picture

Agreed. Unless of course if China were to traded their 3 trillion dollar FX holdings for the physical transfer of gold... I somehow doubt that would happen.

malikai's picture

Until we see the details of a deal we can't make that assesment. If I had the strongest hand at the table, I'd like you to think I was about to fold, too.

pendragon's picture

the world's worst investor - witness bx

Dr Zaius's picture

Dumb is as dumb does.

Irish66's picture

My dad always said the Chinese would own us

Dr. No's picture

Things you own, end up owning you.

wandstrasse's picture

the recent rally in EUR/USD and stocks is VERY eerie. Cannot omit a pre-tsunami feeling.