By Daniel James Hayden IV
There has been growing talk that China will soon increase its purchases of Italian debt in a move that Italian officials hope will drive down Italy's borrowing costs.
Italian Finance Minister Giulio Tremonti is said to have met with Lou Jiwei, the head of the Chinese sovereign wealth fund China Investment Corporation (CIC), in an effort to get the Chinese to buy more Italian bonds.
The European Central Bank (ECB) began buying Italian bonds a few weeks ago after Italian Prime Minister Silvio Berlusconi promised to push through austerity measures aimed at improving the Italian government's fiscal health. The move by the European Central Bank initially drove Italy's borrowing costs down, but the yields on Italian bonds have been rising again amid fears of a Greek default and the repercussions that it would have for other troubled eurozone members.
If China starts buying Italian debt in a bid to rescue the eurozone from collapse, it will be to the benefit of most export-driven Asian economies, not just China's. Investors could choose between a variety of Asian ETFs like the iShares MSCI South Korea Index (NYSEARCA:EWY), the iShares MSCI Taiwan Index Fund (NYSEARCA:EWT) and the iShares FTSE China 25 Index Fund (NYSEARCA:FXI) in order to profit from the improved prospects for Asian economies that Chinese bond buying would create.
Eurozone countries like Italy, Spain, and Portugal have been trying to improve their fiscal health through austerity measures that have hurt their economies. If China starts buying more of their debt, their costs of borrowing will fall and they can shift some of their focus from austerity measures to improving their economies. Economic growth in Europe would give a direct boost to Asian economies as European consumers opened up their wallets and started buying more exports from Asia.
Japan is one country that could do very well if China moves to increase its ownership of Italian bonds. Besides benefiting from the boost to European demand that would come from Chinese bond buying, the overheating Japanese yen could fall lower if investors stopped worrying about the imminent collapse of several eurozone country's and the end of the euro currency.
Investors who have been exiting the euro have been buying up currencies like the Japanese yen and the Swiss franc that are considered safer investments than the euro. The rising yen has made Japanese exports more expensive and is lowering the profit margins of Japanese exporters. A falling yen could send share prices of major Japanese exporters like Toyota Motor Corporation (NYSE:TM), Hitachi (HIT) and Sony (NYSE:SNE) climbing higher. Investors who would prefer to invest in a wide range of Japanese stocks instead of individual stocks should look into the iShares MSCI Japan Index Fund (NYSEARCA:EWJ).
Investors who are interested in FOREX trading and think that China will protect its interests by purchasing more Italian bonds might want to consider investing in the euro through the CurrencyShares Euro Trust (NYSEARCA:FXE) or the ProShares Ultra Euro (NYSEARCA:ULE) ETFs or shorting the Japanese yen with the ProShares UltraShort Yen ETF (NYSEARCA:YCS).
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.