is a Chinese bailout of Italy in the cards?

the situation

The S&P 500 spiked upward into positive territory toward the close of New York trading yesterday.


The Italian government announced that:

–it had sent a delegation to Beijing last month to speak with state-controlled investment companies there about making major investments in Italy, and that

–a delegation of Chinese investors arrived in Rome for follow-up discussions last week.

Italy’s in trouble


The European Central Bank has been supporting Italian bond prices by buying in the market, but indicates that this help is only temporary.   The consensus view is that, in contrast with Greece, Italy is too big for an EU bailout to handle anyway.

According to the Financial Times, which reported the news online yesterday, China already owns about €75 billion of Italy’s €1.9 trillion in outstanding government bonds.

not a great place to invest, but…

On the surface, Italy wouldn’t seem like anyone’s first choice as a place to invest.  The Rome government is inefficient and dominated by the business and political interests of the Prime Minister, Silvio Berlusconi.  Financial practices in Italy are opaque; industry is dominated by a small coterie of insiders who shape the rules for their own benefit.  The establishment is also very hostile toward foreigners (of course, in China’s case that makes Italy no different from the US or anywhere else in the EU).

On the other hand, Italy may have no choice but to deal with China.

what I think China wants

Italy wants China to buy large amounts of its government bonds.  I think China is willing to do that.

However, that’s not what China itself really wantsI think bond purchases only come in return for China’s ability to invest in:

natural resources, a minority stake in the oil company ENI, for example.  Not just a passive interest, either.  China would also want the right to buy specified amounts of output–at market prices–in order to ensure supply of industrial raw materials in times of shortage.  Maybe China would also like to be able to invest side-by-side with ENI in future projects.

a bank or other financial institution.  It’s a fact of life around the world that no one ever gets to buy a healthy bank.  It’s only ones that have horrible loan books that go on sale.  So buying one that it would immediately have to prop up probably wouldn’t bother China too much.  It’s the inside access to the EU that owning an EU financial institution brings that’s important.

stakes in industrial companies–state-controlled or not–where China can offer privileged access to the China market in return for technology transfer.  China is already doing this in Japan.  If business could be done in renminbi, so much the better.

will any deals materialize?

It’s hard to say.  But it strikes me that if Italy is serious, the chances of finding mutually acceptable terms are very high.  China is being frozen out of the US and other parts of the EU; Italy has few other options.  China wants access, and is probably less concerned about money; Italy needs cash.

investment implications

There’s at least some chance of a sharply positive turn away from the psychology of worry that now dominates investor thinking about the EU periphery.  Not something to bet heavily on now, I think, but something to monitor carefully.  (The ultimate buying target for us, in my opinion, is well-managed EU multinationals with substantial non-EU businesses.  Speculate at your peril about what trashy Italian companies China might invest in.)




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