China Tries To Mend Itself Before Buying Euro Debt

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by: Carlos X. Alexandre

The old song "China shoulda, coulda, woulda save Europe" has been on the radio waves for many moons now, and apart form the typical gatherings of high level officials attempting to jawbone sentiment, not much else has taken place.

Last October the word was that "Chinese Vice Finance Minister Zhu Guangyao said that China's contribution to the European stability fund is still 'under discussion' and that there is 'no conclusion yet.'" According to Bloomberg, the latest goes like this, although 100 billion euros is quickly becoming a smaller fraction at this rate, and last October's Greek bailout of 130 billion euros has already turned into 145 billion, according to a Reuters report:

China may "move shortly" to help Europe resolve its debt crisis by providing an investment of as much as 100 billion euros ($132 billion), said Yuan Gangming, an economist at the Chinese Academy of Social Sciences.

I can pinpoint three reports this month alone, and one referred to Premier Wen Jiabao and the lack of a clear message.

Chinese Premier Wen Jiabao raised hopes in Europe when he pledged to consider deepening Chinese participation in European bailout funds, but there is little indication that China is prepared to go out on a limb with a direct contribution.

This week the conflicting messages continued to emerge, with another report indicating that Lou Jiwei is not keen on buying other people's junk bonds.

The head of China's $410 billion sovereign wealth fund CIC brushed aside a call by German Chancellor Angela Merkel to buy European government debt, saying such investments were "difficult" for long-term investors.

"Investment opportunities may lie in areas like infrastructure and industrial projects, and these projects can help economic recovery." That is what he's interested in, or buying assets at discount prices - and who can blame him.

Lastly, China's central bank indicated that it will continue to invest in euro debt, according to Reuters, although the investment products as they exist are not very attractive. In other words, the central bank is not willing to buy junk bonds either, and is looking to minimize risk.

China will continue to invest in eurozone government debt and it remains confident in the euro, the country's central bank governor said on Wednesday, while calling on Europeans to produce more attractive investment products for China.

But let's not forget that the Chinese population is against helping Europe, and if one hasn't noticed, the voices of the people are increasingly louder and being listened to. The Wukan elections may seem like a meaningless event, but it's only a matter of time before the idea starts to spread. Here's an excerpt from a Caixin report:

The Wukan saga that has become a flashpoint for democracy in China took another step forward on February 1, when villagers cast ballots to select an election committee, Xinhua reported. The elections - praised by the villagers as being both open and transparent - are one of the concessions Guangdong Provincials made last December, after residents staged a massive protest against corruption and expelled all Communist officials from the area in December.

Social issues don't stop there, and Caixin also provided a report titled "China's Poor Face World's Highest High School Tuition," which flies in the face of the purported economic power house, and social responsibility.

In one REAP study of 62 nations, China claimed the highest tuition price for public rural high schools: $160 per student per semester, not including costs like housing and everyday living expenses. This is nearly three times the world's second-highest tuition in Indonesia, which also fully subsidizes the education costs of children under the poverty line. It's also a stark contrast to the fact that the vast majority of nations - 93% of those studied - fully subsidize education, including places like Brazil, India and Kenya.

On the financial front and from a macro perspective, in July of 2011 Chinese banks were ordered "not to roll over or renew their loans to local governments' financing vehicles," according to Reuters, but the policy was reversed this month, although the "one-time rollover of local government debt-paper" is portrayed as a unique event.

The Economic Information Daily said the five-year time limit would be strictly enforced and that banks would have to call in loan collateral if debts could not be repaid. "If banks are found rolling over such loans repeatedly, they will get severe punishment," the paper reported, citing a loan officer at a state bank.

Lastly, The Wall Street Journal reported today that "China Injects Funds After Funding Costs Spike," and here is the explanation, although I am more inclined to believe that my local dollar store only carries "Made in the U.S.A." products:

The move by People's Bank of China comes after money was sucked out of the banking system following the completion of China Communications Construction Co.'s 5 billion yuan ($794 million) initial public offering, the world's biggest IPO so far this year, that's locked up around 180 billion yuan worth of funds.

Although Jim Chanos is still on a China rampage, as characterized by CNN, and claims that China's inflation and growth numbers are way off, one must understand that the Chinese economic debacle is a work in progress, and eventually the usual suspect, or debt, will expose the truth. In my opinion China is best understood by putting together the various media reports, not official economic data.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.