You Scratch our Back… Why China’s Tax Cuts & Interest in Europe could Essentially Contribute to Global Monetary Rebalance.

It was hard to ignore the swells in yesterday’s U.S. stocks that took place in response to speculation of global policy makers’ possible plans for economic growth stimulation. However, the US wasn’t the only country to see its stock prices move up so aggressively. CNN reported China’s overseas investments surged to more than $21B, as state-owned companies obtained various global resource-related assets.

A report compiled by private equity firm A Capitol revealed that Europe’s delicate state continues to capture the attention of Chinese companies. Drawing them to the scene is undoubtedly the alluring possibility of obtaining equity at undervalued prices. In fact, China’s second largest destination for investment is Europe; which accounts for 16 percent of outbound mergers and acquisitions.

This number has actually fallen from last years reported 37 percent, due largely to a shift in capital interest towards the realm of resource-related assets. One of China’s largest European investments lies in Thames Waters Company, the UK’s largest water and wastewater treatment establishment. Though the exact amount of appropriated equity isn’t known for sure, the investment is valued at about $778B.

With all of the ongoing stresses about Europe’s faltering economic state, it would be easy for one to find solace in knowing that the world’s second biggest economy had its back in a big way. But, then we start remembering, wait a minute, isn’t China’s economy losing footing themselves?

Yes, but this morning the WSJ’s Market Watch brought good news of interest rate cuts in China, information that will undoubtedly ease fears of the country experiencing a slowdown in economic growth. In a statement the People’s Bank of China posted on its website, it was announced that starting June 8, they will lower benchmark one-year lending and deposit rates by 0.25 percentage point.

An economist from Credit Agricole, France’s largest retail banking group, projects the move to be indicative of policy makers “bringing out the big guns.” He explains further the real impact of the reduction will be most prevalent in sentiment amongst businesses, domestic consumers, as well as the markets.

Economist Mia Hong explains that since the focal point of China’s financial reform is interest-rate liberalization, tomorrow’s change will be a near bull’s eye move for shifting things in that direction. She also forecasts the lowering of interest rates could spark a possible reversal in China’s slow bank lending, which has developed due to lower borrower demands.

This sounds to me like all the right ingredients for economic growth stimulation. And it all comes at an integral time, especially with Europe’s wounded economy permeating others around it. The potential for economic failure within the euro-zone should also have US investors weary of an economic domino effect.

Hopefully Warren Buffett was right in his recent statement that the U.S. economy should be safe from a recession relapse “unless events in Europe develop in some way that spills over here big-time.” Right now though, things are heading in a positive direction for everyone. With China’s interest rate cuts strengthening its own economy, more capital will be available for potential allocation into European investments, thus contributing in some way to global monetary rebalance.

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