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Why is China helping Europe with its crisis?

Underlining the interconnectedness of the world’s economy, China is actively moving to support European efforts to contain a sovereign debt crisis and accelerate a recovery there.

In the past several weeks China has pledged to buy billions of bonds from (i.e. lend to) troubled economies like Spain and Greece. Billions more in trade deals are in the offing.

Why? China is heavily dependent on buoyant European and US markets for its own future economic success.

Today bilateral trade between China and Europe has surged to $100m a day - up from $100 a year less than a decade ago, the New York Times reports.

In short, ‘In embracing Europe, China helps itself’, as analyst Liz Alderman explains.

As Ken Wattret, chief euro-zone economist at BNP Paribas puts it,

“If you’re an export-driven economy like China, and the EU and the euro zone are your key export markets, it’s in your interest to stabilise the financial and economic situation [there].”

There are also immediate reasons for China’s actions.

Firstly, China wants to diversify some of its $2.7 trillion in foreign currency reserves away from low-yielding US bonds and into other investments, including Euro-denominated debt.

(A low yield on a bond means investors are not concerned about default by the country. Amid investor concerns, yields on Spanish and Greek bonds has been rising)

Secondly, China wants to prevent the Euro sliding further (it fell 10% against the dollar last year).

A sharply weaker euro would make goods produced in countries like Germany more affordable on world markets, putting Chinese exports at a disadvantage.

(Germany is China’s largest trading partner in Europe and trade is surging.)

Thirdly, companies in Spain and Portugal have significant strategic holdings in Latin America and in Africa, two regions China has targeted for investment in the past decade and wants to continue expanding.