Posted on September 15, 2011 by Ben Connard
China made news early in the week on reports that it was interested in Italian investments. However, bonds were not the focus. China has purchased European sovereign debt since 2007, partly to diversify its assets, but also to build goodwill.
China may be ready to try and cash in on that goodwill. It’s probably tired of buying bonds that only delay a debt solution. The July bailout of Greece is falling apart as the country continues to struggle with austerity measures. Italy isn’t doing much better. In July, it auctioned five year bonds at 4.9%. Tuesday it paid 5.6% on another set of five year bonds.
Italy’s problems pose more of a threat than Greece. Italy’s debt ($1.9 trillion) is more than Spain, Greece, Ireland and Portugal combined and greater than half of China’s foreign exchange reserve. In other words, China may view buying bonds as a futile effort.
Buying intellectual property or hard assets is a different story. Long term, the assets should have value and it’s not dependent on Italy (or Greece, Portugal, Spain, Ireland) passing austerity measures. Italy has its famous fashion industry with Gucci, Versace among others and its Fiat cars. It is also home to energy and utility companies which have hard assets that could be attractive. I don’t know specifics of the discussion, so I can’t say whether we’re headed for the Rome Coliseum operated by China, but at the very least we’re headed away from simple bond buying and into more complex relationships between nations.