But speculation among traders that cash-rich China might step in and buy hard-hit European bonds, along with Chinese officials suggesting that Beijing would keep supporting the euro, helped the currency claw out a gain Monday after briefly hitting a four-month low against the dollar.
China is making several interlocking plays. Imports from Germany will help keep the heart of the European economy alive. A continent kept solvent with Asian trade flows is more likely to repay its sovereign debt. This new route for recycling currency is a page out of the U.S.'s own playbook for recycling petrodollars. It also gives China a diplomatic lever to wedge Europe away from alignment with the U.S.
I would love to see the Chinese Politburo's 100-year strategy. Everything appears to be going according to plan.
Full disclosure: Long FXI with covered calls and cash-covered short puts. Cash-covered short puts under EFA.