China’s government promises to support the Eurozone by proposing to buy EU government bonds in return for expanded economic relations.
From Reuters,
China is prepared to buy more EU government bonds amid a worsening European debt crisis that is dragging on the world economy, Premier Wen Jiabao said, in the strongest sign of support for its biggest trading partner in months.
The debt crisis, which has dented demand for Chinese exports and dragged China into its worst downturn in three years, was the primary focus of talks between Wen and German Chancellor Angela Merkel who arrived in Beijing on Thursday.
The pair also concluded a flurry of business agreements, including a deal by China to buy 50 Airbus worth $3.5 billion, and multi-million-dollar investment deals involving Volkswagen AG and Chinese telecoms equipment maker ZTE.
But China’s pledge to backstop the Eurozone has been conditional.
More from the same article.
Wen said Beijing is willing to continue supporting the debt-stricken euro zone, and will step up talks with the European Union, the European Central Bank and the International Monetary Fund -- also known as the troika -- to help struggling EU nations.
"China is willing, on condition of fully evaluating the risks, to continue to invest in the euro zone sovereign debt market, and strengthen communication and discussion with the European Union, the European Central Bank the IMF and other key countries to support the indebted euro zone countries in overcoming hardships," he said after meeting Merkel.
Wen, who did not elaborate, said he remained worried about the crisis in the euro zone.
"Recently, the European debt crisis has continued to worsen giving rise to serious concerns in the international community. Frankly speaking, I am also worried," Wen told a news conference.
"The main worries are two-fold: first is whether Greece will leave the euro zone. The second is whether Italy and Spain will take comprehensive rescue measures. Resolving these two problems rests with whether Greece Spain, Italy and other countries have the determination for reform."
China’s government made the same promise before but domestic politics proved to be an obstacle
China Central Bank Governor Zhou Xiaochuan said Beijing would continue buying European government debt in February, but various Chinese agencies, including the sovereign wealth fund, countered the remarks by saying such investments were not wise due to risks.
The article does not elaborate whether China’s central bank pursued to fulfill on the pledge, or deferred until a comprehensive package has been contrived at.
My guess is that the kernel of the current deal of support by China to the EU, may have been set on the condition that bilateral trade will be settled mostly with the use of the yuan and or the Euro.
Both countries also agreed to settle more bilateral trade in the euro and yuan, as Beijing welcomed investments in China's interbank bond market by German banks, and the issuance of yuan-denominated financial products in Germany.
In short, the EU-China accord will work on bypassing the US dollar.
Given the marked slowdown or increasing signs of hard landing in China, it is not clear if China's government will undertake to buy significant amounts of EU bonds.
Nonetheless my guess is that the pact lays the foundation for the expanded use of China’s currency, the yuan, as international medium of exchange and as potential reserve currency, the reduced role of the US dollar, and the evolving balance of geopolitical power.
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