Will China Save the World Economy?

China (NYSE:FXI) is unlikely to contribute to Europe’s bailout fund and investment vehicles being discussed today at a summit in Brussels. Instead it will likely continue to focus on specific countries and specific assets in Europe, strategically contributing funds to nations with which valuable diplomatic relationships can be established while being careful not to become too entangled in the euro-zone mess.

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“I think you can see China (NYSE:FXI) participating possibly country by country because it’s easier for them get concessions on investments and imports and trades and other things at the sovereign level than from the EU,” said Paul Sheehan, chief executive of Hong Kong-based hedge fund Thaddeus Capital.

Sheehan expects that the most likely scenario is a China-Italy (NYSE:EWI), China-Belgium-style deal. China will want to be able to buy European companies and assets with a guarantee that it will encounter no hurdles to conducting business down the line. China has already been an active investor in Europe, a fact that European leaders were well aware of when they began to construct a special purpose investment vehicle, or SPIV, that would lure in private investors.

However, investors are expected to be wary of the plan. Brazil (NYSE:EWZ) has already said it will not buy European bonds as part of rescue efforts, leaving the focus on China, where Klaus Regling, head of the European Financial Stability Facility, will travel to on Friday.

China’s two main investment vehicles would have no problem coming up with the funds that Europe is hoping for should they so choose. China Investment Corp. has nearly $300 billion in its sovereign wealth fund, while the State Administration of Foreign Exchange, or SAFE, manages $3.2 trillion in foreign exchange reserves. But “they’d prefer to do something more diversified across the European countries rather than something like the EFSF. I don’t think China wants to be standing out as owning 40 percent of Portugal’s debt or anything like that,” said James Ellman, portfolio manager at Seacliff Capital in San Francisco.

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However, Europe is Bejing’s biggest export market, and China (NYSE:FXI) has a vested interest in preventing their financial meltdown, which could trigger a global recession. Furthermore, China has been looking to diversify its $3.2 trillion in foreign reserves away from U.S. Treasury bonds, and has been courting more and more business in Europe over the last few years. China remains one of the few big foreign investors still buying European sovereign bonds on the secondary market.

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