Will Chinese Act as Contagion Host to Spread Greek Crisis Across the Globe?

It is no secret that China has massive foreign reserve holdings. Some economic and political commentators have expressed vague warnings regarding this fact frequently in recent years. Yet, there really has been no substantive economic reason to fear the quantity of China's reserves. That is, until now. Most of China's reserves are denominated in U.S. dollars. Though China continues to add to this position, it has shifted its purchases in recent months. China has increased its holdings of gold, while creating positions in New Zealand and even Ecuador. What is perhaps most troubling is China's willingness to

. While this move may be seen as a positive—purchasing European debt may help to prevent a euro crisis—it may have severely negative consequences. What if, at some point in the future, a euro crisis occurs after China has taken a large European position? The idea of a financial contagion within Europe itself is fairly widespread. On Monday, Irish and Portuguese bonds reached new lows despite little news emanating from the countries themselves. Yet, if China has extensive European exposure, a Greek default could make the entire global economy reel. Many other economies within China's region are dependent upon the rising power. Notably, a significant percentage of Australia and South Korea's manufacturing output goes to China. Obviously, China has an enormous economic relationship with the United States, infamously dubbed “

.” While China's willingness to finance Europe may decrease the probability of a euro crisis, should one happen, China's holdings could spread it across the globe.

Traders who believe that China's willingness to support the European markets will be good for the global economy might want to consider the following trades:

Traders who believe that China will suffer when Greece defaults may consider taking positions in the following: