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China Unlikely to Rescue Italy or Europe: Strategist

Well that was fun. The mere thought of a new Sino-Roman investment deal sparked a brief moment of giddiness Monday that the markets have not seen in weeks. Gone were the worries. The foibles forgotten. For 30 brief minutes, China was going to save the world via a shopping spree of Italian debt.

In hindsight, as is often the case, the absurdity of that "silver bullet" solution becomes clear, and since that moment of madness captivated the world, analysts have been coming forward to knock it down, including Standard & Poor's Strategists Alec Young.

"Certainly if China was willing to commit a trillion dollars, a third of their reserves, to bailing out sovereign Europe, that could be a big deal, but I don't think we're there" says Y0ung. "We don't even know what they're doing, if anything, and it's probably going to be something much smaller scale. I don't think they would want to jeopardize their portfolio by making a major commitment to some of the shakiest bonds in the world."

A year ago, China did buy into a beleaguered bond market, with a $400 million stake in Spanish debt. At best, that could be seen as part of a larger desire by the Chinese to diversify their vast holdings of US dollar assets. At worst, given what has transpired in Spain and Europe over the past 12 months, it points to bad timing.

"Barring a major, trillion euro commitment, I don't think it's enough to really solve the problem. It's just the kind of knee-jerk news that gives you a short-covering rally," Young says.

Furthermore, Young says the simple fact that investors reacted the way they did to the notion of a quick external fix "implies a lack of understanding of what is really going on over there." He bluntly adds, "I don't think most American investors get it yet."

"If you look at the track record of China making these marginal investments, it has not correlated to the end of the crisis. So people may want to keep that in mind as they evaluate this Italian news."

In the meantime, Young says a Greek default looks likely and that further austerity cuts are needed to restore investor confidence. Short of that, Young is prepared for a long and ugly workout. "Unless China decides that it's going to commit just obscene amounts of money to backstopping the EU, and I think it's too early to say that yet, we remain pretty cautious on this whole Europe situation."

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