CHINA RUFFLES EUROPE´S FEATHERS / TELEGRAPH.COM.UK ( HIGHLY RECOMMENDED READING )

China ruffles Europe's feathers

By Ambrose Evans-Pritchard

Last updated: September 29th, 2011

                     China must look after its lunch (Photo: EPA)



I have just come from The Economist’s forum on High Growth Markets (ie BRICS +) at The Connaught. For those still expecting China to rescue Europe – a region with a per capita income nine times as high, with debts to match – the head of the country’s sovereign wealth fund could hardly have been clearer.


"We in China are concerned about the unravelling of the situation in the region," Jin Liqun, chairman of China Investment Corporation – which has $300bn to play with.


"China cannot be expected to buy into high risk in eurozone without a clear picture of debt work-out programmes."


"Sorry if I have ruffled feathers," he said, not looking remotely sorry.


"Over time, economies in the EU will be out of woods. We’re optimistic for the outlook," he allowed. However, nothing can be achieve unless EMU states secure the popular consent of their citizens for austerity policies.


Mr Jin, a graduate of Boston University, said there are two big risks in China that "have to be taken seriously":


1) The $1.7 trillion debts of the local government finance vehicles. Half of this is concentrated along the Eastern seaboard in the so-called G7 provinces.


Roughly 10pc of the debt is bad. However, most of the credit went into infrastructure projects that will generate money.


2) The real estate "bubble", as he called it.


This can be managed provided there is no further build-up in debt leverage. First time buyers must put down 60pc in equity, mitigating excess.


The wild extremes so widely reported in the media are an "insignificant part of the market".


3) Risk three is of a different kind. China is "quickly losing competitiveness" as labour costs shoot up.


The surrounding countries in Asia are starting to eat China’s lunch. The only option for China is to move up the technology ladder.


Just thought I would pass it along.


**

Now on to Germany where Angela Merkel has just secured an "own majority" from her coalition for the revamped bail-out fund (EFSF), and saved her career.


All we need next is a fresh vote to boost the fund from €440bn to €2 trillion, the sum needed to prevent contagion to Italy and Spain. Today's vote solves nothing.