Eurozone: China to the Rescue

Growing Chinese investments in Eurozone nations are contributing to stability in the Euro currency, and improving market sentiment on the prospects of the region’s successful fight against a threatening financial crisis.

China has a strategic interest to ensure that the Eurozone weathers the current financial crisis successfully. After all the Eurozone is China’s main trading partner, and the Chinese have a significant holding of foreign reserves denominated in Euro holdings. These holdings estimated at between 26%-28%, the second largest after an estimated 63% – 67% in dollar holdings.

Earlier this year, ratings agencies cut the ratings on US sovereign debt, meaning that the US would be more likely to default on foreign debt, albeit a miniscule likelihood. Therefore a Eurozone crisis would further put the Chinese foreign reserves at risk. In protecting its own economic interest, China is forced by the invisible hand to act for the greater good.

These actions by the Chinese will help to restore positive market sentiment across equity, commodity, currency and bond markets.

The Chinese government on Monday also announced it would be buying larger but unspecified stakes in four of the biggest Chinese banks. This move is to calm markets, after wide speculations that a decline in the fortunes of the Eurozone region could also spell an economic downturn for China. The four banks are Industrial and Commercial Bank of China, China Construction Bank, Bank of China and Agricultural Bank of China.