China Prefers Greece Over the United States

Even Greece's legendary contributions to Western culture have proven insufficient to protect the nation's reputation from being dragged through the mud as a result of its acute debt crisis. Within the pantheon of troubled European national economies, Greece has stood out as a persistent spark in the powder keg.

So when China moved decisively over the weekend to invest in Greece, following a period of sharp reduction in its exposure to U.S. debt, the actions spoke to China's implied outlook for the U.S. economy (and in particular, its currency).

You heard it here first: China may consider Greece a safer bet than the United States. Speculation will swirl regarding China's underlying motives, but these actions by themselves speak volumes.

Chinese Premier Wen Jiabao initiated a tour of Europe on Saturday with a three-day stint in Athens. He issued an explicit guarantee that China will purchase Greek bonds at subsequent offerings and expressed confidence that Greece is already emerging from its debt crisis. Far more than mere rhetoric, this vote of confidence was accompanied by the creation of a $5 billion shipping fund to foster strength in the two nations' respective maritime industries.

Set sail for some seaborne stability
While the United States continues to pump unseemly levels of deficit spending into piecemeal attempts to stave off stagnation, China has consistently funneled its crisis-era spending into strategic initiatives that serve to support the nation's breakneck pace of industrialization. I offered that very dichotomy of spending strategies as the most overlooked story of 2009, and I believe its significance to the global balance of economic power continues to go largely unnoticed.

With a $5 billion investment in Greece's shipping industry, China is filling in yet another jigsaw piece in the strategic puzzle of sustainable industrial and economic growth. Since the dawn of this crisis, I have labored to document the precarious and severely impaired state of the global shipping industry. As has been the case for millennia, within the shipping industry all roads lead to Greece.

Diana Shipping (NYSE: DSX  ) President Anastassis Margaronis warned last year that an acute oversupply of vessels could lead to a "wave of destruction for banks to rival the subprime crisis." By allocating $5 billion to this struggling industry, China has essentially built a small backstop behind that financial uncertainty; which I believe renders dry bulk shipping a somewhat safer investment space on the whole.

In fact, Diana Shipping announced Monday an $82.6 million loan agreement with the Export-Import Bank of China to fund the company's two massive Newcastlemax carriers already on order. Built to the maximum tonnage capacity at one of Australia's key export facilities for coal, these carriers ostensibly provide China another means of ensuring adequate coal supply to sustain future growth. Diana CEO Simeon Palios called the loan "a breakthrough for the future of Diana Shipping," and noted that Wen Jiabao himself was present at the signing.

Although DryShips (Nasdaq: DRYS  ) speculators may be breathing a modest sigh of relief now that one of the pending ultra-deepwater drillships has secured a contract, they will note that it was not DryShips that secured a $74.2 million loan from the China Development Bank over the weekend, but rather Economou's private concern: Cardiff Marine. That shipper will utilize the funds for the purchase of two very large crude carriers (VLCCs) already on order with a Chinese shipyard.

To be sure, China's decisive move to support Greece's shipping industry sends a palpable sigh of relief throughout the dry bulk space. I encourage Fools to watch Diana Shipping closely in the coming weeks for signs of asset purchases that would signal growing confidence in the medium-term outlook for dry bulk as a result of China's financial support. Given the degree to which the shares of quality operators have been discounted by persistent weakness in bulk charter rates, I expect to see companies like Genco Shipping & Trading (NYSE: GNK  ) responding positively to China's "vote of confidence." Shares of aggressive counter-cyclical growers like Eagle Bulk Shipping (Nasdaq; EGLE), furthermore, are likely to feel a welcome boost.

China paints a mighty big picture
China's investment in Greek shippers is but one cog in a string of strategic moves that Fools must consider in their totality in order to draw the correct interpretations. The sum of China's crisis-era strategic actions can be deemed dollar-defensive. The nation's official policy directive -- announced in August -- to support "large-scale gold producers in their development and overseas expansion plans," provides a golden example. The crystal-clear message to leading producers like Barrick Gold (NYSE: ABX  ) and Newmont Mining (NYSE: NEM  ) is that tight bank credit will not block the world's development pipeline for gold from achieving production. In fact, a supply agreement for one-half the gold production from Coeur d'Alene Mines' (NYSE: CDE  ) Kensington mine highlights China's eagerness to secure future gold supply.

This weekend, mere days after the U.S. House of Representative passed a bill designed to penalize China for failing to permit the yuan to appreciate fast enough for Washington's liking, China has made a strongly symbolic move to cozy-up to the European Union and the euro currency. Through both actions and rhetoric, China is casting a vote of no confidence in the U.S. dollar, simultaneously with a vote of confidence in the euro. Premier Wen Jiabao explicitly stated this weekend that China "will not reduce the holdings of European bonds in our foreign exchange portfolio." I encourage Fools to consider investing where China invests.

Fools interested in investing in China are encouraged to test-drive the Motley Fool Global Gains newsletter service with a 30-day free trial. The Global Gains team keeps a close eye on China for opportunities arising from decoupling.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Coeur d'Alene Mines and Diana Shipping. Try any of our Foolish newsletter services free for 30 days.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.


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  • Report this Comment On October 06, 2010, at 5:35 AM, Dangler69 wrote:

    There may be a more pragmatic reason that China appears at this point to prefer Greece. China has substantial reserves in Euro, and a Euro collapse would be very problematic for China. A Greek default or restructure could cause a Euro devaluation. To add to that, although Greece has taken drastic deficit reducing measures, the same actions have killed off any growth potential, and that's where the problem lies. Foreign investment is what Greece needs and China has stepped up.

  • Report this Comment On October 06, 2010, at 9:05 AM, XMFSinchiruna wrote:

    Dangler69,

    China has even greater USD reserves, but we don't see them stimulating Californian industries nor pledging to buy California state bonds even though state debt crises threaten to undermine the safety of the U.S. dollar. That's the point. China is indicating its resignation to the inevitability of dollar weakness, and is positioning with respect to the #2 reserve currency to hold the fiat line and prevent or forestall all-out global currency "warfare".

    http://www.reuters.com/article/idUSTRE69520P20101006?pageNum...

  • Report this Comment On October 06, 2010, at 10:05 AM, Dangler69 wrote:

    TMFSinchiruna, you may be right to an extend; he fact that the printing presses at the federal reserve are overheating due to overuse has a lot to do with the dollar devaluation.

    On the other hand what we're reading as a resignation by the Chinese to help the US economy, could also be confidence that the US has more resources to dig itself out of the hole. There is an imminent danger that the Euro could collapse whereas the USD is more stable (relatively speaking).

    Of course t.

  • Report this Comment On October 06, 2010, at 11:03 AM, XMFSinchiruna wrote:

    Dangler69,

    With all due respect, I think you may be misreading the ongoing currency crisis. The USD has the weakest and least stable outlook of all the major fiat currencies. China is digging in its heels in support of the Euro, recognizing that the world can ill-afford to face the rampant devaluation of both major reserve currencies. Japan confirmed this week that it's a race to the bottom in a game of competitive currency debasement, but the world knows the dollar is the swiftest sprinter about.

    http://www.fool.com/investing/general/2010/09/23/death-knell...

    http://www.fool.com/investing/international/2009/03/27/the-m...

  • Report this Comment On October 06, 2010, at 11:22 AM, mtf00l wrote:

    Let's not forget the IMF stepping up to "help" Greece in her hour of need. An investment in Greece is an investment in the IMF.

  • Report this Comment On October 06, 2010, at 11:33 AM, Dangler69 wrote:

    TMFSinchiruna,

    I understand your points and they are well taken.

    The out-of-control debt is bound to catch up with the US sometime.

    There are always two sides to every story though. The US economy is the biggest in the world, and a collapse of the dollar is sure to send tidal waves to the global economy. If the US defaults, Asia and Europe too will suffer So the game of competitive currency debasement will likely have more casualties than the ones originally intended.

    China too has a real estate bubble that has not burst yet and a severe downturn in either the value of the dollar or the US economy is likely to hurt them as well. They know that and this is why I don't believe they are turning their back on the US. They are simply hedging their bets.

  • Report this Comment On October 06, 2010, at 2:26 PM, silverminer wrote:

    Dangler69,

    A fair assessment, and well argued. Thanks for the discussion. :)

  • Report this Comment On October 06, 2010, at 2:27 PM, silverminer wrote:

    silverminer = TMFSinchiruna

    I always do that! :)

  • Report this Comment On October 06, 2010, at 2:49 PM, Dangler69 wrote:

    Thank you silverminer / TMFSinchiruna, same on your points.

    In reading more of today's news, this whole debasement war may have to do with strengthening the Yuan, or putting pressure on China to do so, or artificially inflating it..... there are so many games being played, but you can see that the US, the EU and Japan want to pressure China to do it.

    We'll see what happens

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