China, Would-Be Saviour of Troubled EU PIGS

For those of you who doubt China's increasing clout in the global political economy, this new phenomenon may make you think again. It is no secret that the European PIIGS of Portugal, Ireland, Greece and Spain have some fiscal issues to work out. However, such concerns may be assuaged somewhat when the world's largest reserve holder indicates that it is willing to buy some euro-denominated debt from them. Ever so aware of the situation in countries he visits, Premier Wen Jiabao now makes boilerplate statements about China considering the purchase of public debt to prop up any number of PIGS.

Earlier this month, we had Greece trying to get on China's good books if and when it starts issuing longer-dated paper again:

China offered on Saturday to buy Greek government bonds when Athens resumes issuing, in a show of support for the country whose debt burden pushed the euro zone into crisis and required an international bailout. Premier Wen Jiabao made the offer at the start of a two-day visit to Greece, his first stop on a tour of Europe, and also said he wanted to boost shipping and trade ties with Athens, underscoring Beijing's use of economic strength to win friends.

"With its foreign exchange reserve, China has already bought and is holding Greek bonds and will keep a positive stance in participating and buying bonds that Greece will issue," Wen said, speaking through an interpreter. "China will undertake a great effort to support euro zone countries and Greece to overcome the crisis..."

A senior Greek government official said Wen made clear his offer concerned buying bonds only when the country returned to markets. Greece, which is currently funded through a 110 billion euro ($150 billion) EU/IMF bailout, is only issuing short-term T-bills for the time being...It has said it wants to return to markets some time next year to sell longer-term debt.

"China is prepared, hand in hand with the EU, as passengers in the same boat, to strengthen cooperation ... to confront the financial crisis," Wen said. "I believe that we can undertake a genuine effort to promote the reform of the international financial system and strengthen its supervision," he said.

And now we have news that the Chinese are courting Portugal's favour as well using the same sort of "debtor diplomacy":

Portugal’s minority government has welcomed a growing appetite by China to invest in the country’s public debt as it struggles to avert a Greece-style bail-out. “China’s interest is the result of a successful strategy of diversifying our investor base,” Carlos Costa Pina, Portugal’s secretary of state for the treasury and finance, told the Financial Times.

Speaking before a state visit to Portugal next week by Chinese President Hu Jintao, a Beijing official said China looked favourably on investing in Portuguese government bonds. China “has always given positive and favourable consideration” to bond purchases when making state visits, deputy foreign minister Fu Ying said on Thursday.

China has previously bought Spanish government bonds and has made a similar offer to buy Greek government debt when Athens resumes issuing. According to a person familiar with Portugal’s public debt market, China has already purchased Portuguese government bonds.

However, Mr Costa Pina said the government had no means of identifying individual investors. “It’s not surprising that Chinese investors want to buy Portuguese debt or increase their positions,” he said. The Lisbon government and the state debt agency had been in contact with Chinese and other Asian financial institutions to promote such investment.

Portugal was keen to diversify its public debt market, he said, as investors from the UK, Germany and France currently accounted for about 40 per cent of the total. “Portuguese debt offers an interesting ratio between profitability and risk,” he added. “Considering the fundamentals of our economy, the yields on our government bonds are much higher than they would be in normal market conditions”.

It's just in time given contentious domestic politics that the ruling party can say "The Chinese will buy our debt." If push comes to shove, who's to say that China can't buy friends and influence countries?