The market structure of the rates of foreign currencies has been thrown into question. China has become more active in the eurozone as a result of the economic conflict with the USA. The Chinese dragon starts to determine quotations on world's basic currencies, such as the euro and the US dollar.
Premier Wen Jiabao of China stated during the meeting with the head of the Greek government George Papandreou that China had purchased long-term bonds, issued by Greece to cover its sovereign debt. Beijing, the Chinese official said, was determined to continue purchasing the bonds if Athens needed new loans to settle its huge budget deficit. Several days before that, the lower house of the US Congress approved the bill targeted against the lowered rate of the Chinese currency vs. the US dollar.
The Chinese premier also said that his nation would continue to support the countries of the eurozone that help Greece in overcoming the financial crisis. The official also said that China was intended to double imports from Greece.
The statement from the Chinese premier resulted in the growth of the European currency on the market. One euro is now traded at 1,376 USD, which marked a record since March of the current year. The euro has gained 8.1 percent vs. the dollar and 7.8 percent vs. the yen since September 10. Thus, the euro has grown considerably over a very short period of time.
As a matter of fact, there are no objective factors for such dynamics of the euro. The real state of affairs is absolutely different. Moody's lowered Spain's rating to Aa1 from Aaa at the time when Dublin said that Ireland would need 50 billion euros (a third of the nation's GDP) to rescue the national banking system. One should also bear in mind the high unemployment level in the European Union.
As a result, Forex currently considers the euro as a real investment alternative to gold, which set another traditional price record last week.
Indeed, money work miracles. Big money work big miracles. China holds largest gold and currency reserves in the world, but its determination to support the European currency may only seem to be a manifestation of good will at first sight.
The assets of the National Bank of the People's Republic of China exceed 2.5 trillion dollars. It's an absolutely natural wish for Beijing to diversify the reserves against the background of Washington's enormous state debt and the pressure that it shows on the quotations of the American currency.
Chinese financial experts acknowledge that the level of the US debt is a highly negative factor. Any growth of the American currency is temporal, analysts say, claiming that the devaluation of the dollar is inevitable. That is why China cut its assets in US bonds by 10 percent from July 2009 to July 2010, to 846.7 billion dollars.
The euro is the only alternative to the US dollar in the foreseeable future. Purchasing European state bonds becomes an obvious decision. The critical condition of the economies of Portugal, Ireland, Spain and Greece (PIGS) makes the entrance to the euro market relatively inexpensive and attractive both financially and politically. EU countries will not hamper the Chinese expansion against such a background.
The Chinese resort to the tactics which they have already practiced in South East Asia and in Africa, where they purchased cheap troubled assets without any conditions. However, it currently goes about the European Union, which is world's second largest economy. Thus, China is willing to take this opportunity to demonstrate its global ambitions to the United States.
Last week, the US Congress approved the bill stipulating economic sanctions against the countries that orchestrate manipulations with national currencies. It is easy to guess that the bill targets China first and foremost.
The US administration is certain that the Chinese National Bank manipulates the national currency to create unjustifiable competitive advantages for Chinese exporters. As soon as Chinese goods reach more markets, including the US one, the unemployment level in the United States grows. The high dollar rate against the yuan makes US goods in China too expensive, and American companies lose the enormous Chinese market with over a billion consumers.
Washington believes that it would be reasonable to increase the yuan rate by at least 20 percent during upcoming two years. However, premier Wen Jiabao stated that China would never agree for such an adventure. If only it happened, China would be shattered with a massive social and economic crisis, the official said.
Beijing is perfectly aware of the fact that offense is the best defense.