China is no “white knight” for the eurozone

Chinese support will help the embattled eurozone over the short term, but structural problems will continue to undermine efforts to resolve Europe’s sovereign debt crisis, analysts said.

Chinese prime minister Wen Jiabao currently on a visit to Europe said China would continue to help Europe and the eurozone through its difficulties. The promise of continued Chinese support provided some welcome relief for European governments at a crucial moment in talks to ensure Greece will not default on its debt.

“China has actually increased the purchase of government bonds of some European countries, and we haven’t cut back on our euro holdings,” Wen said in an interview with the BBC. This demonstrated China’s confidence in the economies of Europe and the euro-zone, he said.

Jon Day, global fixed income manager for Newton Investment Management, said China’s support would only provide a temporary reprieve for the eurozone. “The Chinese may be able to support Europe in the short term by investing in government bonds and bilateral loans, but the underlying problems are much bigger and more structural so they are certainly no white knight for the eurozone.”

China has expressed support for Europe’s troubled economies before and in April it announced it would invest in Spanish bonds and savings banks as well as in the country’s public debt.

Some commentators referred to China as playing a “white knight” role by helping Europe and in that way buying goodwill to make it easier to purchase politically sensitive European assets.

Prospects for the euro are seen by analysts to hang on the success of the latest attempt to bail out the Greek economy. The Greek parliament will vote this week on an austerity package which it must approve in order to secure more international aid.

The parliament is expected to approve the package and Societe Generale cross asset research said it expects the EU to decide on paying Greece’s 5th tranche of aid shortly after. “Given Greece’s brinkmanship, there are good reasons not to hand over the cash, but appeasement and avoiding conflict is more the EU’s way,” the SG research said.

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