China Bails Out Europe and Shortsells It At the Same Time

AfterSomething interesting happened on the way to China’s bailout of Europe. recently China stepped up its Eurosupport rhetoric, and even put a token amount of money where it mouth is, €1.1 billion in directly placed Portuguese bonds specifically, and who knows how much in secondary market purchases, many of the clouds over Europe, and specifically the Euro, have been lifted temporarily, resulting in a modest jump in the EURUSD from just under 1.29 last week to nearly 1.32 today. Which makes sense: after all the EU is China’s second biggest trade partner, and as a habitual importer, China needs the EU’s currency as strong as possible to preserve its imports. Yet what is odd, is that over the past 24 hours we have received numerous notifications that it is none other than Chinese banks that have been selling the EURUSD! Which makes one wonder: is China’s European “rescue” just one big bait and switch distraction?

Keep in mind that it was just announced that Chinese FX reserves swelled to an unprecedented $2.85 trillion, jumping by a massive $199 billion in Q4, the biggest amount on record. And of course, this is not all USD denominated. In fact, according to estimates, the euro accounts for 25% of the total amount, or about $710 billion. Seen this way, it suddenly becomes far more clear why China is much more focused on the EURUSD, and why every marginal change in the pair actually has a far greater impact on the country’s asset allocation decisions.And China is the best when it comes to strategically allocating FX reserves.

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