(eToro Blog) Recently, comments made by the Chinese Premier Wen Jiabao and Zhou Xiaochuan, the governor of the People’s Bank of China (PBOC), signaled a new willingness to become more deeply involved in the European Union’s debt crisis, with an aim to helping resolve it. That financial assistance was a long time in coming; over the past several months the E.U.’s leadership has been regularly calling on Beijing. In spite of the current problems with Greece, which aren’t a confidence builder by any means, persistence apparently does pay off, as E.U. President Herman Van Rompuy will no doubt attest.
Indeed, the news of Beijing’s intent gave a solid lift to share prices, and not just to Asian equity markets but other emerging markets, as well. The MSCI Emerging Markets Index surged 1.1% on the news, the largest advance in weeks, and on Hong Kong’s Hang Seng Index, shares in Chinese stocks climbed 2.4% to a 2-week high. It was a similar story in the Brazilian, Russian and Indian stock markets. Commodities and commodity-linked currencies got a similar boost.
Their past hesitancy to invest further in the Eurozone is clearly valid, and to be fair, Beijing has already committed funds to the E.U., directly and indirectly, through investment in very specific, high grade European sovereign debt, and the European Financial Stability Facility (EFSF), the Eurozone’s bailout fund. While Premier Wen Jiabo had said only that China was ready to become “more deeply involved,” the PBOC governor said specifically that they would continue to invest in the EFSF as well as to buy sovereign bonds, but would also hold onto and increase the Euro-denominated assets under it’s control.
Naturally, China would expect any aid it would give to come with conditions that would need to be met. Analysts point out that those conditions are likely to include not just wider structural reforms, in line with what the International Monetary Fund has already called for, and a credible long-term plan, but greater guarantees as well. That could include access to specific European entities and sectors that could ultimately further foster Chinese growth, i.e., shares in industrial or technology based companies.
As the second largest economy in the world, and clearly the driver of the rest of the world’s economic growth, it is ultimately in China’s best interests to keep the Eurozone – which is its primary trading partner – from self-destructing. By helping the E.U., China helps itself in the long run.
It won’t be a quick undertaking certainly; Beijing isn’t about to simply hand over massive amounts of its reserves. Rather, they will proceed as they always have, with great caution. With inflationary pressures still above the central bank’s target, Beijing won’t want to worsen one problem while helping to mitigate another. Nonetheless, given recent growth forecasts – robust by any other measure, but clearly slowing for China – the government will do all within its power to put the economy back on the proper path.
Copyright 2012 eToro Blog
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