Any hope that China will come as a white knight to the rescue of the European countries is dashed when Fu Ying, its Vice Foreign Minister, said that "China cannot use its US$3.2 trillion in foreign exchange reserves to save other countries". This is Beijing’s strongest rebuttal yet to the talk that they will bail out the European countries.
However, this crisis has provided a golden opportunity for the Chinese government to buy into any European quality names which is too good to miss. We believe that any bailout will come in the form of investment rather than purchase of bonds.
Despite the latest cut of its Required Reserve Requirement (RRR) by 50bps since 2008, the Chinese government reiterated that it is not their intention to loosen the property control but rather to help ease the liquidity problem in the economy. This signifies that China is still battling with its own set of problems, with high inflation and slowing economy their utmost concerns.
Bearing these in mind, Investors are therefore advised not to get carried away by the RRR rally and forget that the big global macro overhang remains, with the European crisis far from over.
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