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China’s “NO” To Europe Just Got Louder (VGK, FXI, EWI, UUP, EUO, FXP)

December 5th, 2011

Jim Trippon: What part of “no” does Europe (NYSEARCA:VGK) not understand? China (NYSEARCA:FXI) seems to be telling Europe just that in no uncertain terms. Politely but clearly; firmly. In recent stories out of China reported by Bloomberg and Reuters, China officials are saying loud and clear-or maybe softly but no less clear– to Europe, that no bailout will be forthcoming. Actually, China is saying this again.

Earlier in the fall after the suggestion was put forth that China ride to Europe’s rescue via a large debt buying spree amounting to a massive cash infusion, China politely declined, saying, in effect, “we wish Europe the best, we hope Europe solves its debt crisis, but no thank you as far as buying bonds in mass quantities.” Okay, China’s policy makers didn’t say it that way literally, nor is it a translation from Mandarin, but you get the point. Did Europe?

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In a recent speech in Beijing reported by several news agencies, Vice Foreign Minister Fu Ying said China could not use its $3.2 trillion in foreign exchange reserves to come to the rescue of Europe. Ms. Fu, whose area of concentration is Europe, is able to comment on policies but the Foreign Ministry does not have direct influence or control on how the foreign exchange reserves are or aren’t used. She was quoted in a Bloomberg story as saying that foreign reserves aren’t money that simply “can be used by the premier or finance minister.” She also reminded that “foreign reserves aren’t revenues.”

China Deputy Foreign Minister Fu Ying

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The Eurozone Now

Although it’s easy to be completely cynical about the eurozone debt crisis and say that any efforts at solving it were and are still doomed from their inception, that might be both unduly harsh and not completely accurate. After more than a year of increasingly intensified attention, Greece’s debt looks as though it will still run at 160 percent of its GDP, so the logical outcome of that simple math still reads as certain default. Yet the European Union has been battling, perhaps valiantly, perhaps quixotically, to solve what may be an impossible problem.

Thus far, however, it has held off a massive, complete collapse of the weaker nations’ economies which might trigger a seemingly inevitable collapse of the EU along with a severe and long lasting global recession, or perhaps worse. The recent moves, though, to shore up bank liquidity by the major central banks’ concerted easing, still don’t address the deeper restructuring issues that make the continent’s economies unstable. So, in addition to trying to get the stronger European countries, notably Germany and anybody else willing to step into the breach, to prop up Greece, Italy (NYSEARCA:EWI) and the other weakened EU members, Europe has turned to China.

China’s Worries

China, however, is concerned about its own economy. With GDP slipping from its super-robust mid-nine percent year over year growth rates down to a recent quarterly increase of 9.1 percent-a growth rate unimaginable in developed economies such as the US and, oh yes, Europe, along with continued concerns about inflation, China still has lots to worry about within its own borders. Much of its $3.2 trillion in foreign exchange rests in US dollars, something which is itself another concern for China’s policy makers, as the dollar, though still considered the world’s reserve currency, isn’t what it used to be. Read: it’s much weaker.

China would like to diversify its foreign exchange reserves so that it isn’t only holding dollars, as the nagging concerns about the continued weakness give rise to the legitimate concern about whether the dollar (NYSEARCA:UUP) will, in the future, be able to maintain its status as the world reserve currency. China has put some of those foreign exchange reserves into Europe, by the way. It’s just that nobody except China really knows how much or how little China has invested in European debt.

Goods Ready To Be Shipped From Shenzhen

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When you are still a developing economy, despite your recent meteoric rise to prominence, with much in the way of growing pains and many problems, and are sitting on $3.2 trillion that some of your arguably profligate trading partners covet, naturally you would be nervous. So China looks that way, and who can blame it? It has tried everything to encourage Europe, traded with Europe, spoken softly to Europe, lectured Europe, but when it gets right down to it, why should China throw more of its foreign exchange reserves at Europe? Would you as an investor make such a move?

While perhaps China could be enticed with something other than ten-year Greek bonds that yield 28 percent-and who is buying these?-China has recently begun to deploy some of the $1.7 trillion of its other resources it has committed to shoring up its own economy over the next five years. Seems reasonable. As Ms. Fu pointed out, China was not even allowed to use its foreign exchange reserves to alleviate domestic poverty, let alone bail out foreign countries. The Bloomberg piece further quoted Fu as saying, “The argument that China should rescue Europe does not stand.” Again, what she says makes sense, and what China’s doing-or not-makes sense, too.

Written By Jim Trippon From Global Profits Alert

Jim Trippon, founder of Trippon Financial Media, Inc., is a maverick that has dedicated his investment career to helping investors make smarter financial and stock selection decisions. Trippon, an internationally recognized expert on global and value investing, has a deep passion for finding hidden value in global equity markets. Trippon started his career as a financial statement examiner with Price Waterhouse which allows him to dissect a public company’s financial picture and better identify hidden gems. Trippon’s savvy approach to investing and personal finance makes him in high demand by major media who seek his unique perspective on stocks and global economics. He has been featured in top publications both in the US and abroad including Bloomberg, Investor’s Business Daily, The New York Times, The International Herald Tribune, Stock Futures and Options Magazine, The Bull and Bear Financial Report and he regularly appears on broadcast television including as an on air contributor to CNBC, CNN, Fox Business, and Fox News.

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