Eurozone debt crisis means opportunity for China
- Source: Global Times
- [22:23 March 08 2010]
- Comments
By Shangguan Zhoudong
Greece's debt woes, which are hitting the value of the euros amid rising concerns about the fiscal conditions in the eurozone, are causing massive social upheaval in a country used to a bloated public sector and generous pensions.
But from the investment angle, they might be an opportunity for China to diversify its huge foreign exchange reserves and improve its trade relationship with the European Union, China's biggest foreign trade partner.
On Thursday, Greece raised 5 billion euros ($6.84 billion) from a 10-year bonds issue by offering a higher yield of 6.3 percent than other eurozone countries. But Greece also needs to issue 10 billion euros worth of bonds in April to refinance its huge government debt, as the EU has yet to announce substantial support.
China, with $2.4 trillion in foreign exchange reserves by the end of 2009, might be the white knight that Greece needs to save it from its debt crisis.
China is more than capable of playing such a role. Its foreign exchange increased by $453.1 billion in 2009, a daily increase of $1.24 billion, as data from the central bank shows.
Investing in the EU is also in accordance with China's efforts to diversify its foreign exchange assets. Its overall strategy is to deploy its foreign exchange reserves with a focus on safety, liquidity and value.
For all investments, safety is the most important factor to be taken into consideration. Greek debt may look risky at first. Credit rating companies dropped Greece's sovereign credit ratings in December, as Greek's fiscal deficit approached nearly 13 percent of its GDP.
Nevertheless, the risk of Greece defaulting on loans is very small, since it would threaten the integrity of the entire eurozone. In the event, there is strong reason to believe that other eurozone countries, especially France and Germany, would step in to save Greece.
Lowered credit ratings also mean that Greece will pay a higher yield to attract investors, as the 5 billion euro bonds issued on Thursday showed.
Meanwhile, Greece is taking measures to turn around its fiscal deficits, according to Angel Gurria, secretary-general of the Organisation for Economic Co-operation and Development (OECD), who said he wasn't concerned that the country will default on its debt.
The country last week announced an additional deficit cut package worth 4.8 billion euros to rescue its economy.
In contrast to the chance offered by low-risk government bonds, China Investment Corp, China's $200 billion sovereign wealth fund, is now suffering huge losses from equity investment in US investment bank Morgan Stanley and private equity fund company Blackstone.
With European countries' debt crisis under the spotlight, we may neglect another giant debtor, the US, where the federal deficit also hit a record $1.42 trillion in the 2009 fiscal year, about 10 percent of its GDP. The US also bears about $12.4 trillion in national debt.
Additionally, the US dollar has appreciated about 6 percent versus euro since the start of the year, but the yuan's exchange rate has been maintained at 6.83 against the US dollar since July 2008 after a 21 percent gain in the previous three years.
This indicates that the purchase of euro-denominated bonds will also help China gain from the exchange rate after selling US dollar assets, on the hope of European and world economic recovery.
At the moment, China remains one of the top holders of US debt. China held $894.8 billion in Treasury securities at the end of 2009.
But "don't put all your eggs in one basket" is a golden law of investment, and almost all institutional investors are decentralizing their investments to spread risks.
The rule also applies to China, whose huge holding of US dollar assets are being criticized as their value is depreciating amid the global financial crisis.
The euro is already the second global currency after the US dollar. The share of global foreign exchange reserves held in euro was 27.7 percent at the end of September last year, according to International Monetary Fund data, indicating investors' strong confidence in the eurozone economy.
The EU is also China's largest foreign trade partner and the recovery of the region will help companies and consumers there buy more Chinese goods.
Improving relationships with the region by bailing Greece out of its current crisis will not only be a good financial investment, but a wise diplomatic move.
The author is an analyst at a Beijing-based consulting company. forum@globaltimes.com.cn
