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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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Thu, 10/27/2011 - 15:28 | 1818352 Schmuck Raker
Schmuck Raker's picture

Well, that went swimmingly.

Next stop on the Sarkozy Debt Express... Russia! [toot toot]

Thu, 10/27/2011 - 15:32 | 1818372 LawsofPhysics
LawsofPhysics's picture

The MSM is completely ignoring this story.  Why does this make me nervous?

Thu, 10/27/2011 - 15:36 | 1818381 Smiddywesson
Smiddywesson's picture

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

Their people are pathetic slaves, just like us.  They read what their owners print for them, and think what their owners want them to think.  They factor into this about as much as the OWS crowd factor into Ben Bernanke's actions. 

I view this as just another stage in the Punch and Judy Show.  Last week it was rumors about finance ministers within Europe fighting with each other and "The EU Plan."  Next week, it looks like it will morph into Chinese and European puppets hitting each other over the heads with sticks and the rumors about "The Chinese/EU Plan."

Wake up.  The only plan that is being executed is kick the can and buy gold.  The whole EU rumor mill and "Plan" schtick was about buying time, that's it.  So, here comes a major co-conspirator in the gold game, a country that coordinates its margin hikes with the West, offering another plan?  Absolutely hilarious.  This should be worth another month's worth of can kicking and gold buying.

Thu, 10/27/2011 - 17:02 | 1818704 Mr_Wonderful
Mr_Wonderful's picture

Right, a bubble will secure another bubble. Makes sense. In 5-10 years the cost of extracting gold will still be at a few hundred bucks per ounce. Silver extraction cost will still be at $5-10, if that.

Thu, 10/27/2011 - 15:38 | 1818388 TuesdayBen
TuesdayBen's picture

Anyone who's ever seem 'em lined up 10 deep struggling to get to the gaming tables in Macau knows there's plenty of dumb money there...

Thu, 10/27/2011 - 15:40 | 1818395 topcallingtroll
topcallingtroll's picture

Dumb money is always very sensitive to being seen as dumb money.

Thu, 10/27/2011 - 15:48 | 1818438 Smiddywesson
Smiddywesson's picture

Dumb money is always very sensitive to being seen as dumb money.

Oh yes, and doubly so for telling the painted harlots of the MSM they are whoring for Wall Street.

There's a great line in Tolken about how incensed a liar becomes when, for once, he tells the truth and is not believed.  Reality hurts. 

Thu, 10/27/2011 - 15:57 | 1818464 beatus12
beatus12's picture

china has in the near future the most elderly

on the planet - 400 million plus, how they gonna

take care of that many seniors and europes as well?

 

Thu, 10/27/2011 - 16:25 | 1818580 LawsofPhysics
LawsofPhysics's picture

Humanely - then soylent green.

Thu, 10/27/2011 - 16:15 | 1818550 vegas
vegas's picture

WTF

Don't want to be seen as source of dumb money?

Er, how much of US Treasuries do you hold?

Thu, 10/27/2011 - 16:18 | 1818560 PulauHantu29
PulauHantu29's picture

If China bites it will prove "The Greater Fool Theory."

Thu, 10/27/2011 - 17:26 | 1818763 PulauHantu29
PulauHantu29's picture

"....Beijing must be given strong guarantees on the safety of its investment..."


"We promise to pay it back....really....cross my little EU heart...."

LMAO

Thu, 10/27/2011 - 22:45 | 1819631 randomdrift
randomdrift's picture

They could sell them Libya.

Fri, 10/28/2011 - 00:30 | 1819885 besnook
besnook's picture

fn brillant. china has extorted the eu into using the renmimbi in another, and most significant, move towards yuan reserve status. they now hold the economic(and political) future of the west in their bank account. the chinese officially rule the world now.

 

it is only a matter of time before the usa finds out it has been checkmated and decides to blow up the board. the usa holds the dumb money. you gotta be dumb to hold dollars.

Fri, 10/28/2011 - 12:59 | 1821366 randomdrift
randomdrift's picture

Why do you think that the Chinese Communist Party is any different from the Western Banksters? They all are the same "people," and agree to the same general program.

Yes. They now rule the World. They do that by controlling its finances, just as they did with England after 1815. The exceptions are a few places such as Thailand, Iran, some other Moslim and Latin American Nations, and much of Africa but they are fomenting wars and revolutions in those remaining free places. 

Fri, 10/28/2011 - 00:52 | 1819910 chindit13
chindit13's picture

China cannot bail out itself*.  China is merely being asked to endorse the plan.  Putting up fictitious "money" lends a seal of approval to the fictitious money Europe's "leaders" just conjured up.  Everyone is pretending there are these huge buckets of unused monies just lying around, like surplus grain stored in the event of a bad harvest.  China's contribution will be the much vaunted and little understood "FX reserves", which already exist in another form (yuan) within the Chinese economy.  The Chinese wealth is double counted. The European monies are from some future more perfect world.  It is bad enough to eat the seed corn;  it's even worse when the seed corn itself is imaginery.

*anecdote....Chinese jade buyers, who traditionally finance themselves through the shadow banking system, contracted to buy $5.2 billion worth of jade in two auctions held in Burma earlier this year.  That money would represent upwards of 30% of Burma's GDP.  The buyers have since reneged, either because of an inability to secure domestic Chinese financing or because the merchants realized Chinese end users lacked the ability to purchase what had been selling like grilled chicken heads on a stick.  A recently imposed 30% tax on luxury imports also had some not so minor impact.  Along the border of the Middle Kingdom the impression is that a very ill wind doth blow in China now.

Fri, 10/28/2011 - 01:03 | 1819925 htp
htp's picture

A clever idea by China. But under those conditions, Europe would be better off printing money on its own.

One must see that at this point, borrowing debt is no different than printing money. No one expects the PIIGS to pay back their debts.

It would be utterly insane for Europe to borrow foreign money to shore up the euro.

Fri, 10/28/2011 - 04:49 | 1820062 Grand Supercycle
Grand Supercycle's picture

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Bullish USD weekly/monthly and bearish SP500/DOW monthly
charts will eventually ensure a violent reversal of equity uptrend.

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