Presidents Hu and Sarkozy Take Tea

The gravity of the moment was no doubt lost on French President Sarkozy last Thursday when he was summoned to ‘stopover’ in Bejing to take tea with President Hu on his way to New Caledonia. China has close to USD 800B invested in European Government bonds, which effectively makes President Hu Europe’s private banker. Hu is worried about the safety of China’s capital.

About 10 years ago, China was concerned about its foreign reserve exposure to the US Treasury market and the USD. The State Administration of Foreign Exchange (SAFE) consciously decided to reduce its USD exposure in favour of the Euro, and this new benchmark allocation proved successful until the European Debt Crisis revealed itself. China believed that fiscal discipline in Europe would prevail and has continued to fund its position throughout the crisis, even to the extent of providing additional loans at below market rates of interest earlier this year.

So, you can imagine China’s dismay at the disunity currently being exhibited by the EU and the market reaction to the EU’s attempts to contain the crisis and impose fiscal discipline? China still operates a centralised political system which, unlike the EU, would not tolerate the sort of dysfunction it has witnessed, nor delay in implementing a decision once taken. Desperate to obtain clarity on the situation, China decided to reach out to the head of the EU – hence the call to Sarkozy.

The official statement following the meeting speaks volumes:

“China has the confidence in the European economy and the Euro, and we are sure that Europe has the wisdom and ability to surmount its current hardships and maintain economic stability and growth,” said Hu. “China will continue making Europe one of its principal investment markets, and we hope that Europe will take measures to ensure the security of Chinese investments there.”

My guess is that Europe still sees China, and Asia generally, as a junior economic partner it can exploit, rather than its bankers. Let’s hope Sarkozy listened to Hu’s encouraging words, as they were a very pointed and public directive to Europe’s Governments and politicians – they mean ‘solve the problem and make good on our investments, or China cuts you off”!