Clutching At Desperation Straws - China To Bail Out Europe... Again

Hours after the details of the Euro Summit were released when it became clear it will be yet another failure, following a drop in the Euro Basis Swap by 10 bps to 127 bps, to week earlier levels, and not following a rise in the all important EURUSD, it was time to recycle old rumors all over again, knowing full well some positive market reaction had to be engendered or else the entire rally of the past two weeks would be undone, here comes the latest regurgitation of the tried and (very much un)true "China to Rescue the World"TM rumor, this time from Reuters. The media company which has become the latest conduit of favorable market rumors says that "China's central bank plans to create a new vehicle to manage investment funds worth a total of $300 billion to improve returns on the world's largest stockpile of foreign exchange reserves, a source with knowledge of the matter told Reuters. The vehicle would operate two funds, one targeting investments in the United States and the other focused on Europe, said the source, who asked not to be named because of the sensitivity of the matter. The vehicle's goal is to make more aggressive overseas investments for higher returns, said the source along with a second, independent source, who also declined to be named." So far so good. And the bad news: "Details of the venture are still under discussion but key personnel for managing the venture have been agreed upon, the sources said." Oh, and the funds have names, but that's all. So to summarize: details are unknown, China growth is collapsing, home prices and inflation are supposedly plunging, and it is now conventional wisdom that the PBoC will have to bail out China all over again from a hard landing, but... the key personnel for a fund that may or may not exist and which will have no impact whatsoever on the $2 trillion in rolling European debt over the next two years, have been selected? And futures are up on this?

More on this latest farce:

The investment vehicle would be affiliated with China's State Administration of Foreign Exchange (SAFE), the part of the central bank in charge of the daily management of China's $3.2 trillion in foreign exchange reserves.

 

One of the funds would be named Hua Mei, or China-US, for investments in the United States, and the other is named Hua Ou, or China-Europe, for investments in European markets.

 

The style of the funds will be similar to the low-key Hong Kong-based Hua An, also known in English as SAFE Investment Company Ltd, said the source, through which SAFE has purchased stocks in dozens of overseas listed companies.

 

The People's Bank of China, the central bank, was not immediately available for comment.

That's probably not surprising.

As for the natural next question where funding will come from, apparently China will now fund investment into Europe, by selling bonds into the domestic market!

The second source said the new venture would likely be based in Shanghai and may also sell yuan bonds in the domestic market.

 

"The company will issue yuan bonds," the source said. "Then it can use the yuan to buy foreign currency from the central bank or even commercial banks for overseas investment."

So the fate of Europe rests in the bond buying appetites of "one billion red Chinese"?

Check please.