The stock markets rallied as China agreed that it would not pull several hundred billion dollars in investments from Europe. This marks the first time that Chinese economic superiority has been so publicly confirmed, with markets rallying on the news that China was in for the long haul.
China’s European Influence
The news broke early on US shores that the massive $300 billion sovereign wealth fund owned by the government of China would not withdraw its investments in Europe and instead wait out the financial downturn. The decision was important in part due to the fact that China’s European investments could drain European debt and credit markets should they be sold to outside investors. Though the investment dollars would not come directly from Europe, it would displace other investment dollars that are helping to stem the massive budget shortfalls in Greece, Spain and Portugal.
China Holds the Cards
With more than $2 trillion in foreign reserves, it is now clear that China has a powerful hand over almost every economy in the world. It holds corporate debt, stocks, bonds, and treasuries from every country.
Should China exit any area, it can leave a massive void to be filled by other investors; however, there are few investors, whether governments or central banks, that could even afford to make the massive investments China holds today. China holds all the cards in the game of worldwide trade, sucking interest payments out of foreign debtors and keeping every country on its toes.
The New Economic Superpower
The difference between China and all other economic superpowers of the past is that all of the Chinese wealth is held by one entity, the government. With so much power in so little hands, China can twist and turn any economy into submission. Even the United States, in which China is said to hold as much as $1 trillion in federal debt, could easily be broken should China choose to exit.
Though there was no metal, and no award, it’s painfully obvious that China is now the economic superpower to watch. The question is whether China will use its power for good or will it find these newly found powers too strong to ever let sit idle.