China's EU Support: Just Talk?

According to news reports in February, China seemed fully prepared to provide support for the Eurozone. Beijing certainly committed itself to not selling any sovereign debt.

Bloomberg (Feb 15th, 2012)..."China pledged to invest in Europe’s bailout funds and sustain its holdings of euro assets, spurring gains in the currency and Asian stocks on optimism the region’s debt crisis will be overcome. China will always adhere to the principle of holding assets of EU sovereign debt, People’s Bank of China Governor Zhou Xiaochuan said in Beijing today. 'We would participate in resolving the euro debt crisis, he said, echoing comments by Premier Wen Jiabao yesterday."

The Stakes
The remarks offer a carrot to European finance ministers, who are increasing pressure on Greece to deliver budget cuts in exchange for a second bailout. At stake for China is its commitment to stabilize the economy of its largest export market amid a global slowdown that has curtailed growth in Chinese shipments abroad.

"Wen and Zhou are giving the best support China can offer now, which is to send out positive messages such as promising not to cut euro assets and to buy European bonds to help bolster market confidence, said Shen Jianguang, a Hong Kong-based economist at Mizuho Securities Asia Ltd. who previously worked at the European Central Bank. 'How much and when China will buy will depend on its foreign-exchange investment strategy -- when they find the pricing and exchange rate favorable."

Today, however, we heard from CIC, China's sovereign wealth fund. And the message seems just a bit different.

WSJ (today)..."Mr. Lou said CIC sold down its exposure to European peripheral countries a long time ago, before incurring any losses, and has reduced its holdings of European stocks and bonds. Right now we find there is too much risk in Europe's public markets, he said."

Say What?
It doesn't sound as though CIC is prepared to buy Spanish or Italian debt, which is what the Eurozone needs now. At the moment, the fund may not even hold any, which, in a convoluted way, would have made it quite easy for Wen and Zhou in February to say they weren't planning to reduce their holdings. China could set up another vehicle (outside of CIC) to make Eurozone investments, but that possibility is remote and unlikely to be of consequential size. Either way this statement seems to indicate that all the talk about helping the Eurozone with its crisis was just that -- talk.