Despite Europe´s continuing problems with Greece, amongst other countries, the Chinese have not yet given up their support and still seem to be determined to support the European economy. The emphasis, though, is being put on the “real economy”, as stated by Lou Jiwei, chairman of China Investment Corp, who said: “any fresh injection of funds into Europe would be in industrial and other real assets, not government bonds”.
The Chinese are willing to help, but they are clearly following a sustainable long term strategy investing in “real economy” versus “making money with money”.
Basically, what has been happening is that when investing in a government bond, the issuing government received a loan, which in turn “should” be used to invest in their economy. The banks, which should function as intermediaries and handle redistribution of these funds, often withhold these funds to pad their balance sheets out of fear of not being paid back if borrowed.
The bottom-line: the money is not making it to where it is needed and often is even used to engage the derivative market, due to the high “possible” returns which can be achieved with a huge leverage.
The issue with derivatives is that this is a “zero-sum game”: the wealth or risk is simply transferred from one party to another and to every winner there is an equivalent loser. The Chinese aren´t willing to play this game.
The Chinese are making a good call with this approach, something we in the west could possibly learn from.