Will China Bail Out the World?

With fear running high on global markets, particularly regarding sovereign debt in the Eurozone, many commentators are asking: will developing nations flush with cash (i.e. China) ride into town and save the day?

From Reuters:

Italian Economy Minister Giulio Tremonti said on Thursday that Asian investors are reluctant to buy Italian bonds because it sees they are not being bought by the European Central Bank.

Speaking at a news conference, Tremonti also said it would be desirable for the central bank to follow the lead of the Japanese and Swiss central banks in taking expansionary steps to tackly the euro zone’s crisis.

“I note that the Bank of Japan today launched quantitative easing and the Swiss cen bank cut rates to zero, we are waiting for decisions if possible, but desirable (from the ECB),” Tremonti said.

When you talk to Asia they say: “We don’t understand what Europe is,” he continued. “The second point is that they say ‘if your central bank doesn’t buy your bonds, why should we buy them”?

That is a fairly unqualified no. And why should they? As Amschel Mayer de Rothschild famously put it:

Buy when there is blood on the streets

And China are entitled to hang onto their money and let asset prices depreciate further to get more bang for their buck. But some signs suggest they will act. The more Europe and America deteriorate, the weaker the demand for Chinese goods.  And China’s massive FX holdings’ value is dependent on the system of international trade and the economies of various Western nations retaining functionality. Most importantly, the only remedies that Western governments have are money-printing, and (China’s worst nightmare) debt-forgiveness, neither of which the Chinese would like to see.

Of course, China stepping in to buy shoddy debt isn’t going to offer any  solutions to underlying problems. At best it will kick the can do the road awhile, as Europe muddles around and continues to fail to come to any kind of meaningful or coherent agreement on its future. So as as Europeans clutch furiously at (Chinese manufactured) straws, there is still only one bailout party in town:

11 thoughts on “Will China Bail Out the World?

  1. China cannot bailout Europe or USA for that matter, it is too big to bailout. they are playing a game of GO ! on the international board like their grandmaster sun-tzu taught em the Chinese legeacy is helping them to become a grand nation of the future without actually waging a war.

    • Precisely, Marcuz.

      They will intervene and buy up Western assets when they get cheap enough — because the only remedies that Western governments have are money-printing, and (China’s worst nightmare) debt-forgiveness, neither of which the Chinese would like to see.

  2. Do you think China will waive the next world hegemony, or continue to do so if it already has? China has a unresolvable demographic problem from the birth control policies in the late 20th century where each couple was unallowed to give birth to more than one baby – combined with the extreme boy preference from Confucianism, it has granted the nation an ever-diminishing workforce with a whopping 1.3:1 ratio of boys versus girls being born. More importantly, China’s so-called Sinocentrism is only getting more extreme by the day and it’s freaking out the nearby nations. For example, China is purposedly faking historical records and artifacts to contain all adjacent civilizations to incorporate their history into its own. The consequent diplomatic attitudes are undermining relations with neighbor superpowers – Russia, India, and Japan – Russia is concerned with its plunging population that its vast Siberian riches may be overtaken by Chinese population, and India and Japan are in neverending territorial disputes over Kashmir region and Senkaku islands.

    I expect the global powers to be diversified during this century. America will certainly be unable to hold its “world police” position due to tons of debt and foreign containments. China has too many problems including the ones mentioned above, ever-increasing corruption, and the possible political unrest that would result if the nation was to undergo democratization(this will happen sometime, probably in the next few decades). Russia has a gigantic nuclear arsenal but also has a plunging population and its industry depends too much on its natural gas, of which prices will fluctuate due to the global unrest in almost every parts of the society. I’m rather bullish on India – it has a democratic government(although flawed a lot, it’s still amazing to have one in a country with GDP per capita barely over $1,000), an ever-increasing population that will soon exceed that of China’s, an economy drived mainly by domestic demands, and excellent information technology with a vast pool of talented people.

    I can currently feel China expanding robustly though. I live in South Korea, maybe one of the 57 states that Obama visited during his campaign(see: http://www.youtube.com/watch?v=EpGH02DtIws ). Several years ago our major exports were semiconductors and integrated chips, which changed to oil products & chemicals, steel products and commercial ships because of the constant demand from China to build its infrastructure, import commodities and export almost everything that America and Europe outsourced to China due to the “lower costs there.” I fear, though, if an abrupt end comes to the American hegemony and Pax Sinica begins, that Korea will either lose sovereignty and succumb to be a mere satellite of China or even worse, become a battlefield of an apocalyptic nuclear warfare which would result from the struggle for power between history’s greatest military superpowers.

    Thanks for reading (if you followed this far), and sorry for any bad English.

  3. “an ever-increasing population that will soon exceed that of China’s, an economy drived mainly by domestic demands, and excellent information technology with a vast pool of talented people.”

    I disagree with you there, India has very little skilled “Industry-Engineers” they are to much focused on the service economy and have no real industry like China, Germany and to some extent even the USA. They haven’t had the industrial revolution. No country/civilisation can skip steps towards maturity

    And the information technology stuff is useless without the fundamentals, wich they are also lacking majorly.

    I don’t think China will engage into open war.

  4. The key is the global supply chain. Some Indian companies (e.g.the Ambanis) have done a great job at integrating theirs. But nothing and no-one compares to the Chinese state.

    I don’t deny they have demographic issues. I don’t deny they have a massive misallocation of capital and labour (perhaps not as bad as America’s hordes of stagnating unemployed). But they are the greatest industrial behemoth in the history of the world, and the largest net-creditor (both in dollar terms and as a proportion of global GDP) in history.

    Their interests are in continued global peace: American debt stabilisation, dollar stabilisation, and global prosperity and security, because these three factors will allow them to buy up huge chunks of the world, while their economy continues to modernise and starts to consume more.

    However, those who wish continued American hegemony (and while this does include Mitt Romney and Rick Perry, these are not just Americans) may wish to disrupt the strengthening of China, and prevent them from buying up global assets.

    • I now see all of your points. I’m not worried about China engaging into an all-out war, since it would mean China vs. the rest of the world. What I concern is as soon as the N. Korean monachy comes to a downfall(it is bound to, I think in a few years or several years at the soonest), China may move and station its army in N. Korea(it’d be favorable for China since it would guarantee them the harbors to advance into the East Sea and give a significant geographical advantage against the US troops stationed in S. Korea and Japan). Meanwhile, S. Korean constitution states that “all of the Korean Peninsula” is under its jurisdiction(although it is nominal), and we’ve got a conservative, war-friendly president and congress(much like Bushit, yeah). It’d at least trigger local clashes and if a war-hawk like Rick Perry is the US president at that time, KA-BOOM.

  5. I still wonder just how much of the world China will be able to effectively buy up with its mountain of US confetti. I guess we’ll see.

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