beyondbrics

A reminder from Beijing that the Greek crisis is anything but a local difficulty. Speaking in advance of prime minister Wen Jiabao’s visit to Europe next week, the foreign ministry said China’s “vital” interests were at stake if Europe could not resolve its debt crisis.

Investors seem to agree. With so much talk of a Greek default even good jobs and housing numbers from the US failed to boost Asian equity markets on Friday. The Hang Seng closed 1.17 per cent down amid a general drop of 0.7 per cent in Asian emerging markets, as measured by the MSCI Asia ex-Japan index.

“Contagion is the big fear,” said Jason Teh, a Sydney-based fund manager at Investors Mutual told Bloomberg. “The stock market is pricing in some of that fear.”

In Beijing, vice foreign minister Fu Ying made clear that China had tried to help the European Union overcome its troubles by buying European debt and encouraging bilateral trade with its largest trading partner.

“Whether the European economy can recover and whether some European economies can overcome their hardships and escape crisis, is vitally important for us,” Fu said, Reuters reported.

As beyondbrics has reported, Wen is due to visit Hungary, Britain and Germany late next week, a few months after he visited France, Portugal and Spain and offered to help Europe overcome its debt woes.

Since the turmoil in eurozone debt blew up last year, China has repeatedly said that it has confidence in the eurzone and bought unspecified amounts of European debt, including Greek bonds.

With Greece even closer to default than before, investors are keen to know whether China will pledge to buy even more debt debt from the vulnerable countries of Greece, Portugal, Ireland and Spain. China has an estimated quarter of its $3,050bn foreign currency reserves in euros, but does not publish details.

The MSCI Asia ex-Japan index has lost 2.54 per cent this week, 9.4 per cent since its 2011 peak in early May, and 4.6 per cent since the beginning of the year. This compares with gains of 0.8 percent in the US S&P 500 and a drop of 3.3 percent in leading European shares.

Greece, of course, is not the only factor, with investors concerned about possible stagnation in the developed world, inflation risks in emerging markets and a possible hard landing in China. But events in Athens could yet go from bad to worse. Friday’s Cabinet reshuffle, with the appointment of a new finance minister, is a critical attempt to bolster political stability. But even if it succeeds in the short-term, Greece remains deep in crisis – as Wen will see first-hand on his trip.

Related reading
Greek deal fails to ease contagion fears, FT
Editorial: Evaporating reform of Greece, FT
Insight: Policymakers can’t kick the can, FT
Poland to China: you’re fired, beyondbrics