While many investors in the developed world were disappointed that Beijing offered no firm announcements to purchase European sovereign debt, the Chinese leadership offered numerous subtle hints about its role in the unfolding crisis. Investors may take some comfort from the answer provided to a question posed by the Chairman at the recently concluded World Economic Forum.

From CNTV.cn:

BEIJING, Sept. 15 (Xinhuanet) – Chinese Premier Wen Jiabao attended the opening plenary session and business dialogue of the World Economic Forum Annual Meeting of New Champions 2011 in Dalian and answered questions raised by Executive Chairman Klaus Schwab of the World Economic Forum and entrepreneurs.

Q: “Mr. Premier, you mentioned in your speech the challenges facing many countries in the world, especially in the financial sector. My question is: what measures can China take to help the international community, especially relevant European countries and the United States, to cope with these financial challenges?”

A: “If we take a look at the current international and financial situation, we will see that as the world economy slowly recovers, uncertainties and destabilising factors are also growing. Some major economies are experiencing sluggish growth and high unemployment.

‘”The United States now faces three tasks: controlling debt, cutting budget deficit and creating jobs by growing the economy. Some countries in Europe are in a sovereign debt crisis, and what's most important is to stem the spread of the crisis. The volatility of the US dollar has destabilised international commodity prices and brought emerging economies under inflationary pressure.

“Under these circumstances, China has become inextricably linked with the development of the world. We must first put our own house in order, and at the same time, play our part in reforming the international economic and financial systems, maintaining world economic stability and development and promoting robust, sustainable and balanced economic growth.

“Being the largest developed country in the world, the United States has a strong economy, a solid scientific and technological foundation and a rich talent pool. We are confident that the United States will be able to overcome difficulties and achieve sustained economic recovery. We hope that the United States will pursue the right economic policies, maintain fiscal and financial stability and uphold the interests and confidence of global investors.

“When I met President Obama last year, I proposed to him that China and the United States engage in large-scale financial and economic cooperation. This proposal has two key components: First, the United States needs to open its market to investment by Chinese enterprises to turn debt into investment and enhance US employment. Second, the United States needs to export more to China. The United States now holds the key to this problem, and it should relax its export restrictions. Former US Commerce Secretary Gary Locke once said that every one per cent increase in US exports to East Asia will create 100,000 new jobs in the United States. My proposal was appreciated by President Obama, and I hope that China and the United States will adopt such a positive approach to address their trade imbalance and enhance business cooperation.

“Europe is China's comprehensive strategic partner, and we have followed closely the economic development and difficulties in Europe. When some European countries run into sovereign debt crisis and economic distress, we have said on many occasions that we are ready to help and will continue to invest in Europe. In a recent phone call with President Barroso of the European Commission, I once again told him clearly that China believes in Europe's ability to overcome the difficulties and is willing to invest more in Europe.

“At the same time, I hope that leaders of the EU and some European countries will also view China-EU relations from a strategic perspective. For instance, they should recognise China's full market economy status. As a matter of fact, according to the agreed terms of China's WTO membership, China will be recognised as a full market economy in 2016 internationally. To show goodwill a few years earlier is the way how friends should treat each other. Next month, I will meet with the EU leaders and I hope breakthroughs can be made on this issue during that meeting.

“Japan is a close neighbor of China. China and Japan have a lot to offer each other economically and a large bilateral trade. The challenges confronting Japan now are caused by the recent tsunami and nuclear leak. But we believe that post-disaster recovery and reconstruction will bring the Japanese economy back on the track of fairly rapid growth. When Japan was in the most difficult situation, we also offered help in trade, tourism and other fields. Last but not least, we must not forget developing countries. They are the ones that suffered most in the financial crisis. They face unprecedented challenges in growing the economy and tackling inflation. We need to extend them a helping hand.

“China has recently provided two tranches of food aid to African countries and offered humanitarian assistance to countries experiencing turbulence in the Middle East and North Africa. The world must unite and act as one in times of crisis and difficulty. This is the principle that China will continue to uphold in the future. Thank you, Mr. Schwab. Thank you all.”

Given the timing of these comments, coming just one month before Premier Wen’s meeting with European leaders it seems likely that he is preparing a “wish list” for use in his future negotiations. Reading between the lines, it appears that Premier Wen is telling the US that Beijing is more interested in making investments in US corporate assets, including equities, rather than its government debt.

Furthermore, China would be willing to increase its investment in both debt and equity if it buys more of China’s exports. In similar fashion, Premier Wen appears to be signaling China's willingness to help Europe, but first, the EU needs to recognise China’s full market economy status, which will enable it to sell its exports more freely.

During the same WEF program, Dr. Li Daokui, one of the three academic advisors of the PBoC’s monetary policy committee, discussed China’s plans to transition away from investments in U.S. Treasury securities. He reportedly said the following: “The incremental parts of our foreign reserve holdings should be invested in physical assets. We would like to buy stakes in Boeing, Intel, and Apple, and maybe we should invest in these types of companies in a proactive way.”

A politically divided and financially weak Europe is an ideal place for Beijing to leverage its financial flexibility. If the EU agrees to recognise China’s full market-economy status in exchange for bailout money, it will represent a major breakthrough in China’s financial diplomacy. As a result, Beijing’s ‘soft-power’ will rise in tandem with any accumulation of EU debt. The impact will also be felt in the currency markets, as China would also be in a position to exercise some impact on the euro.

Over time, both the U.S. dollar and euro ultimately could be subject to deeper Chinese influence. That these are both the prime competitors for the Yuan should not go unnoticed, either. After each financial crisis over the last four years first in the US, then the EU, China has emerged in a stronger position.

At the same time, China’s debtors have become more beholden to Beijing’s desires which has major implications for currency values and corporate ownership down the road.

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