China’s Place In the Eurozone Crisis

24 October 2011

The fates of large economies are very much intertwined. Don’t believe me?

Take a look at this Bloomberg news excerpt on continuing E.U. woes and then the comparative snapshot of the Hang Seng and Dow Jones indices, both dated October 21st.

“Euro Leaders Begin ‘Tough’ Six-Day Marathon on Greece, Banks”

European leaders braced for a six- day battle over how to save Greece from default, shield banks from the fallout, and build more powerful defenses against the debt crisis rocking the 17-nation euro economy.

In such difficult times (especially in Europe), we should look carefully at the impact of the current crisis on the new world power, especially given their heightened propensity to invest within the Caribbean.

In September, announcements were made in connection to $1 billion in loans to Caribbean countries available through the state-run China Development Bank to finance infrastructure projects.

China makes no bones about wanting to dive into the Caribbean’s pool of natural resources, and fortifying their political muscle. With anaemic growth conditions present worldwide, this burgeoning relationship is no surprise. China helps to develop the developing, and in return develops, well…themselves. An annual growth rate of 24% in trade between China and the Caribbean is testament to this theory’s credence.

In the very recent past (2010) Jamaica has had to introduce a gas tax to help repay a Chinese loan. A JM $8.75 per litre tax which was initially directed to road repair, would have been channelled toward the foreign loan for the very same purpose. Transport Minister Henry, in trying to justify his Government’s decision, said the amount of money coming in from China was 20 times that collected from the gas tax, which at that time was $1.5 billion.

However, motives aside, China is a force to be reckoned with for at least decades to come. The ongoing crisis has very real implications for their continued willingness and ability to bankroll our comparatively tiny economies, should national interests be compromised. Cornell University professor, and former head of the IMF’s China division Eswar Prasad, speaks to a trifecta of possibilities if you will:

  1. a stronger US dollar and by extension,
  2. a stronger yuan, and
  3. diminished growth in Europe, which remains China’s largest export market.

A stronger dollar keeps a lid on oil prices (bad news for us energy sector-reliant economies). Take a look at the table below to get an idea of PetroChina’s (the country’s 2nd largest refinery) global position in terms of value. PetroChina has recently stated that the refining division is expected to see losses of over 50 billion yuan ($7.83 billion) this year if fuel prices remain at the current level for the rest of the year.

To offer some perspective, that figure exceeds the $7.2 billion trade figure as at 2010 between China and the Caribbean.

Imagine these losses widening to greater multiples of our trading activity, unless sustainable measures are introduced to stop the haemorrhaging in Europe.

Nearly every emerging market economy competes directly with China, therefore, each also has a careful eye on any sharp rise in the Chinese yuan. While this may provide some boost to investor confidence since the US trade deficit could be cut by as much as one third, it may also cause unemployment within China since their exports would’ve become more expensive. The global economy spirals downward (again) back into recession as a result.

Europe accounts for 20% of Chinese exports, and Europe’s growth rate is expected to slow to 1.5% this year. China, themselves a real catalyst behind the global recovery after the 2008-09 financial crisis, is experiencing declining growth for the third consecutive quarter. Given Europe’s state of affairs and China’s European market concentration, we can expect China to provide tied-aid to the troubled region. Premier, Wen Jiabao, said the country remains ready to help Europe through its current debt crisis, but said Europe must recognize China as a full market economy (CNBC).

The EU granting China the status of a full market economy before the World Trade Organization (WTO) does so in 2016, means that Chinese products get better treatment in trade disputes with Europe.

That’s a hell of a bargaining chip! Amazing what you can do with the financial firepower to back it up.

This leads me to promote my mantra of “cautious activity over inactivity” being the only way to benefit from such volatility. Apart from your ‘bread and butter’ Caribbean sovereigns and corporates, one would do well to look at liquid (and investment grade) Latin American credits e.g. Panama (BBB-) and Chile (A-).

Keeping ‘dry gunpowder’ is understandable, but don’t let it cloud your vision…a good deal is a good deal. Take it.

Gerard Stephens
Account Executives

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