DEBT FINANCING. Italy opens door to China to avert debt crisis

Hong Kong (CNN) – It’s a different world when a European country, in this case Italy, can’t rely on its own neighbors to help with financial support. It’s a different world when it can’t even rely on the world’s biggest economic power, a still sluggish United States, to help prop it up. And you know it’s a different world when Europe’s third-largest economy calls out to the cash-rich People’s Republic of China for help.
But that is what appears to be happening.
Italy has basically invited China to make “significant” purchases of bonds and other assets to help the European country out of its financial debt crisis. And the interesting thing is that China could do it – if it wanted. And in fact, it’s also come to light that Chinese investors and Italian government officials have made trips to each other’s capitals for “talks” over the past few weeks.

Giulio Tremonti, Italy’s Finance Minister, led a delegation to Beijing recently. He met with officials of China’s State Administration of Foreign Exchange, or SAFE. He also met with investors from China Investment Corporation, also known as CIC.
Lou Jiwei, Chairman of CIC, led his own investor group to Rome the week after, according to the FT and Wall Street Journal. What’s so special about CIC? It is China’s largest sovereign wealth funds with assets of nearly $410 billion. Set up in 2007, its purpose is to invest some of China’s $3.2 trillion of foreign currency reserves.
Now compare that surplus with Italy’s debt hole: $2.3 trillion. That number is more than the combined debt of Portugal, Ireland, Greece and Spain. As for its debt-to-GDP ratio, Italy’s is a whopping 120% – second only to Greece’s 140%.
So would China really put its money into Italy? Or would it actually take a wait-and-see approach?
Right now, there’s no indication that any agreements have been inked and China has not specifically mentioned anything about talks with Italy. Still, a China Foreign Ministry spokesperson did touch on the general financial health of Europe at a press briefing earlier Tuesday.
"China is confident about the European economy and the euro. Europe will continue to be China’s main investment market. We would like to expand financial and economic investment cooperation to address the financial crisis."
But even if CIC did want to invest in Italy, it might not be able to. Just a few months ago, the sovereign wealth fund revealed it only has about 4% of its total assets in cash. As it turns out, it may be cash-rich but not liquidity-rich. Its money is mostly tied up in North America, Asia-Pacific and Europe.
Still, China has long been trying to increase its investment presence abroad, as well as to diversify away from the U.S. dollar. And Italy’s call for help may be that door that Beijing will want to walk through to Europe.

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