Tuesday, January 11, 2011

China Buying Bonds, Deals, And Influence In Europe

A role reversal is underway in European-Chinese relations.  The 19th century imperial game that Continental powers once played in carving trade legations out of the Middle Kingdom is about to come full circle.  China wants to fund sovereign debt purchases in Europe in exchange for influence:

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.