Imagine you are a senior Chinese official; a member of the Politburo responsible for among other things, international finance.
The EU has come calling, begging bowl in hand, to persuade you to lend them money to keep the EURO afloat. You currently hold about $3.4 trillion in liquid foreign currency reserves.
Should you lend the EU your money?
There are three good reasons for the Chinese government to provide support for the EURO
- The EU is your country’s largest customer. If the EURO tanks or the EU goes into recession, your export industry on which the country relies heavily will be badly hurt.
- You cannot use this money in China. To repatriate the money you must first convert it from dollars, EURO and Yen, to RMB which would sharply revalue the RMB raising export prices, causing even greater damage to your export industry.
- You would like nothing more than to diversify your holdings away from the U.S. dollar. It is really upsetting to use your country’s reserves to support your greatest competitor. And, the only other currency large enough to deal in trillions is the EURO.
On the other hand, there are serious questions which should be asked and answered before committing your country’s hard earned reserves.
The EU is the world’s largest economy. Why come begging to you, when the EU can certainly solve their EURO problems using their own resources?
Why aren’t the Germans and the French taking the risk?
More importantly why should China take the risk on the EURO when the German’s and French themselves are unwilling?
This is the EU’s problem. They know risks better than you. Perhaps you should follow their deeds not their words
The French and German Governments tell you that your money will be safe because this time the Germans and French are taking steps to ensure that in future all EURO countries play by the rules limiting the budget imbalances which is the root cause of the present problem. However, when you think back, was it not those same French and Germans who first broke the rules in 2008? It seems silly to count on those who were responsible for the problem in the first place, to ensure that the same problem does not recur.
They tell you that they will bring in the International Monetary Fund (IMF) to guarantee your money. However, it seems that in recent years the IMF has been hijacked by the EU, giving most of the IMF money (which includes your money) to the EU. How can you rely on an organization run by the EU and for the EU, to act in China’s interest when that interest may conflicts with EU needs.
The decision is of course yours, but remember you have a family, position and some real wealth. You do not want to risk everything on a bad deal which your government does not support, the Party does not support and the people do not support.
A more important question is, what should you do after the EU falls into depression and the EURO finally collapses?
Here you would have more positive approach.
The EU is home to many good companies and some very good property. During a depression when capital dries up and banks are unable or unwilling to provide support, even some of the best assets are cheap.
The money you do not throw away lending to the EU can be used to buy some very good capital assets on the cheap. For example $3.4 trillion is more than the value of the entire German automobile industry.
Imagine using a part of your money to buy Volkswagen. You would become a hero to the people and be seen as a great asset to the party.