Reports from the Financial Times and the Wall Street Journal have claimed that China Investment Corporation (CIC) is considering buying Italian government bonds. According to the reports, CIC has been having meetings with Italian officials over the last month.
Presently, the cost of borrowing for Italy is higher than ever. When this happens, one way to reduce the interest rate is to bring in a big buyer, such as China. CIC has approximately £250Bn of assets and is entirely owned by the Chinese government. If it was to buy Italian assets Italy would be in a much better position to finance their economic growth.
It was claimed by the Financial Times that last week meetings were held in Rome between the chairman of CIC, Lou Jiwei, and the Italian finance minister, Giulio Termonti as well as other government officials. In addition, it was reported that the meetings have included conversations about investments in Italian companies as well as in government bonds. Further, it stated that more discussions will be held in the near future.
A senior government official for China, Wu Xiaoling, has stated that Beijing is prepared to collaborate with Europe with the aim of increasing market confidence. He went on to say that China will support the measures being taken by Europe to keep the euro stable.
US stocks rebounded on Monday as a result of the news that China is looking into buying Italian assets and the losses that were incurred earlier that day were reduced. However, the same was not true for the Asian markets which experienced mixed reactions due to uncertainty as to whether the move would aid the eurozone’s debt problems. It is feared that China’s purchase of Italian government bonds would do little to help the situation in Europe as other countries such as Greece might still default on their debts.
Italy’s debt makes up 23% of all debt held by the eurozone. It makes up a massive 120% of its GDP. The International Monetary Fund has calculated that in order to rearrange the debt to make it more manageable, Italy first needs to raise funds totalling to 20% of its GDP in 2012.
In contrast, China has massive amounts of cash including foreign exchange reserves of more than $3tn making it unsurprising that struggling economies are reaching out to it for help.
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