Is China betting on or against Europe?

The role of the Far East in the Eurozone's ongoing debt saga is becoming increasingly fascinating.

China has reportedly bought €1.1 billion of Portuguese debt in a direct sale. And Japan - not wanting to be outdone - has announced that it'll buy €900 million worth of bonds to be issued by the EFSF (the Eurozone bailout fund) at the end of this month.

Bill Gross, who manages PIMCO - the world’s biggest bond fund - dismissed all this action, saying that,

there are claims of Japan and China and so on, but they're really looking for the private institutions like PIMCO and other insurance companies to buy, and we just have not done that yet.

French daily Les Echos has a slightly different take, arguing that "Asia has decided it will save Europe."

But a different analysis altogether comes from leading finance blog Zero Hedge. They write that China's banks are currently switching their euros (which amount to 25% of China's currency reserves) for dollars, meaning that China is actually ditching the Single Currency. The Chinese know that their €1.1 billion "investment" in the eurozone is effectively underwritten by the ECB, which continues to buy Portugese junk bonds.

The result is a temporary increase in the value of the euro relative to the dollar, which allows China to sell their euros for more than if they had not spent the €1.1 billion. The blog estimates that the profit could be in the area of $11 billion. The blog writes:

Here's the math: assuming roughly €510 billion in EUR-denominated holdings, just the last 5 day jump in the EURUSD from 1.29 to 1.31 means that the USD value in a static pool of €-holdings has increased by about $11 billion (on paper). But here's the kicker: it is not on paper, and if the rumors are true, China is actively converting EUR holdings to USD. It appears that the mid-1.31 range is one appropriate exit point. So from an IRR standpoint, China invests €1.1 billion in Euro peripheral bonds knowing full well that the biggest backstopper is the ECB, in essence letting the country frontrun Europe's taxpayers. And in return it gets a marginal improvement in its FX holdings to the tune of $10 billion. In other words, every 100 pips improvement in the EURUSD results in a ~$5 billion boost to the USD valuation of EUR-denominated holdings. And if the latest €1 billion investment allowing the country to "buy" $10 billion in FX gains is any indication, China sure knows what it is doing.

Furthermore, with it allegedly actively selling EURs as a result, it appears that the country is in effect betting against Europe, and is continuing to reduce its 25% EUR allocation, with the USD as a beneficiary.

Speculative, that's true - but does anyone else have the feeling that Europe isn't quite in the ballgame?