If European officials were hoping that China would become its debt-busting sugar daddy, those hopes just got dashed.
Speaking in Beijing last Friday, Chinese Vice Foreign Minister, Fu Ying, flatly refuted the idea of China using some of its massive currency reserves to throw Europe a lifeline.
China currently holds $3.2 trillion worth of foreign exchange reserves – the largest in the world. So at first glance, you might think it would be easy for the country to help the Europeans. After all, Europe is China’s top export market, so an economically strong Europe certainly benefits China.
Not so fast, though. As Reuters revealed, two-thirds of those reserves are stashed away in fixed, dollar-denominated assets. That leaves $470 billion available, and with China already investing about 20% of its holdings in euro assets, it’s not keen to up the ante any further.
There’s more to the story, though. And the Chinese reasoning is as simple as it is sensible…
China Gets An “A” for Paying Attention
For starters, there’s no chance of China dishing its reserve funds to help Europe because it “cannot use this money domestically to alleviate poverty,” according to Fu Ying.
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Why? Because the reserves are essentially the country’s “savings.” The Reuters article quotes Fu as stating that the Chinese learned the lessons of the 1997 Asian financial crisis – the most important of which is to have ample reserve funds in case of catastrophe.
Hmm… seems that’s a lesson the United States and Europe should also learn. I guess they were home sick when that particular “Economics 101” class was taught.
Second, even if China’s Foreign Ministry wanted to help Europe, the office doesn’t have a say in how its foreign currency reserves are spent.
So it looks like Europe will have to go to Plan B in order to climb out of its debt mess. But other than running its printing presses 24/7, I’d be surprised if the region even has one. As we’re seeing, it’s proving extremely difficult for so many diverse nations to reach a consensus on what to have for lunch, never mind economic and monetary policy.
So much for a “union,” eh?