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China and Japan promise help for the euro

Sovereign debt crisis | China and Japan promise help for the euro Anthony Harrington

We all knew that there would be many a twist and turn in the Euro sovereign debt crisis before it finally plays itself out, in whatever manner that might be. However, one of the bigger surprises in recent weeks has been Japan’s announcement that it would not only follow China in buying European bonds, but that it was planning to take up to 20% of whatever might be on offer if the European Financial Stability Facility starts to raise new funding.

One somewhat cynical fund manager I spoke to about this, who wishes to remain anonymous, said that he saw the hand of the US Government in Japan’s announcement. The theory here is that the US is pressuring Japan in order to have an ally who can offset China’s clear play for increased influence in Europe.

China, of course, has already wooed the Greeks very successfully, buying relatively small chunks of Greek debt and making some high profile investments. And its announcement that it stood ready to help support the euro predated Japan’s announcement by several days. As Lisa Twaronite, Tokyo bureau chief for MarketWatch, noted, Europe is a major export destination for both China and Japan, so buying European debt and helping to prevent the sovereign debt contagion from getting out of hand makes good commercial sense for them.

In fact, Twaronite makes the point that with its massive foreign exchange reserves, China could very easily do a great deal more than it has been prepared to do so far. After all, the Euro crisis has been rumbling on for months now. Japan looking to take 20% of whatever is on offer will not be making that much of a dent in its foreign currency reserve holdings, but it could achieve quite a nice diversification away from its dependency on the US dollar. Quite whether diversifying into the euro is a great play right now is, of course, a different kettle of fish altogether.

However, Japan’s Finance Minister Yoshihiko Noda was in a bullish mood when he spoke to reporters. “The eurozone is planning to issue a large amount of bonds in a cooperative manner late this month to raise funds to assist Ireland, and it is appropriate for Japan, as a major economy, to buy some of the EFSF bonds to bolster confidence,” he said, according to Dow Jones newswire. He also said clearly at the time that Japan would consider purchases in excess of 20% of whatever sum was being raised.

So far, although EU finance ministers are considering raising the sums involved in the EFSF, the current plans are for up to €16.5 billion to be raised in 2011, and up to €10 billion in 2012. If Japan were to buy 20% of that stake, it would barely scratch the surface of the country’s foreign exchange reserves, which are well in excess of $1 trillion.

Both countries stand to garner substantial goodwill from a major trading partner by their support and both will be engaging at the very least in diversifying a little of their mammoth dollar FX holdings. China’s cuddling up to Greece, the dogsbody, or unloved rump of the Eurozone, is eminently understandable. Shipping is hugely important for China, which imports vast amounts of raw materials and exports equally vast quantities of finished goods. The world’s dominant ship owners are largely Greek, which gives China a natural interest in seeing a stable Greece, and in portraying itself as a good friend to Greece. Recent reports say that China is prepared to establish a six billion euro fund to support Greek shipping companies. It has also paid Greece 3.5 billion euros for 25 year concessionary rights to the port of Pireaus, where it is said to be building two container terminals.

Further reading on the European sovereign debt crisis:


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