China's Euro Bailout More About Trade Than Diplomacy: The Ticker

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By William Pesek

The last 15 years have been nothing short of tumultuous for the International Monetary Fund.

In 1996, the Washington-based lender was hardly a household name in London, New York or Seoul. A year later, as Asia crashed, the IMF was front-page news and steering the world economy away from the abyss. The same was true in the last couple of years of the 20th century as Russia defaulted and Latin America hit yet another wall.

The 2000s were less kind to the IMF as markets and economies boomed and pundits questioned its relevance. Even the global crash of 2008 failed to return it to center stage. The sex scandal that did in leader Dominique Strauss-Kahn didn't help. Nor has the capable and charismatic Christine Lagarde taking the reins restored the IMF's prominence.

The problem? Increasingly, it's China.

Who needs the IMF's money and the strings attached to its assistance when China has $3.2 trillion of currency reserves to deploy? Yet the popular explanation for China's sudden European largess -- that it's about diplomacy -- is only half the story. Increasingly, it's about protecting China's key trade market.

Markets are buzzing about Italy's overture to China this week. It's one thing for officials in Athens, Lisbon or Dublin to hit up Chinese officials for financial help. It's quite another for Europe’s third-largest economy to seek Chinese support for its bonds. If ever there were proof Europe's debt crisis is deepening and spreading, this is it.

China isn't buying euro zone debt because it's a good investment. It's to keep the euro from weakening and undermining China's trade advantage. European Union nations comprise China's biggest trade partner. The dollar is sliding as the Federal Reserve pumps liquidity into markets and debt sales continue apace. Keeping the euro from plunging versus the yuan is a growing priority for Beijing.

It's a sign that Chinese officials worry exporters are set for a challenging 2012. It's also a reason to doubt that China will allow the yuan to rise markedly against the dollar as the world economy slides anew. China may need all the money it can scrape together to support domestic growth.

The IMF may soon be back in business after all.

(William Pesek is a Bloomberg View columnist.)

-0- Sep/13/2011 20:02 GMT