A flurry of headlines out of China suggest global macro-economic volatility may be ready to take it to the next level. We discussed last week how China's oh-so-generous offer of help to Europe was merely a veiled threat playing US against Europe in a game of who-gets-the-funding. Well, tonight, it seems, they are making good on some of those threats. Aggravated by EU's lack of market economy recognition, they pull trading lines with French banks, express concern at the EUR's safety (preferring US Treasuries), and indicate a clear preference for bonds over stocks - all the while warning of growing trade tensions - consider the sabre-rattled.

Initial comments from Commerce Minister Shen via Bloomberg:

*CHINA DISAPPOINTED EU HASN'T RECOGNIZED MARKET ECONOMY STATUS *CHINA MARKET ECONOMY STATUS IS POLITICAL DECISION, SHEN SAYS *CHINA MARKET ECONOMY STATUS NOT TECHNICAL ISSUE, SHEN SAYS *CHINA'S HELP TO EUROPE, MARKET STATUS HAVE NO DIRECT CONNECTION

was quickly followed by the 'threat/promise':

*MOFCOM'S SHEN: EU DEBT CRISIS MAY RAISE CHINA TRADE FRICTION *CHINA MOFCOM IS CONDUCTING REVIEW OF NESTLE-HSU FU CHI DEAL

and then Reuters reports:

A big market-making state bank in China's onshore foreign exchange market has stopped foreign exchange forwards and swaps trading with several European banks due to the unfolding debt crisis in Europe, two sources told Reuters on Tuesday. The European banks include French lenders Societe Generale , Credit Agricole and BNP Paribas. "Apart from spot trading, all swaps and forwards trading (with the European banks) have been stopped," one source who is familiar with the matter told Reuters.

And the piece-de-resistance of the night was, again from Reuters:

China, the largest foreign holder of U.S. government debt, will keep buying U.S. Treasuries, the official People's Daily, the ruling Communist Party's mouthpiece reported on Tuesday, citing government researchers. In an article about the reasons for China's increased purchase of U.S. Treasuries, the newspaper cited Yan Xiaona, a researcher with the Chinese Academy of Social Sciences, as saying that the dollar "is relatively safer than the euro" because of the unfolding sovereign debt crisis in Europe.

Furthermore, as if he had just read our earlier debt vs equity post:

Wang Chaocai, a Ministry of Finance researcher, was quoted as saying that "what else we can buy if not U.S. Treasuries? It's more risky to buy into equities."

Lastly, for feces and giggles, China Daily just had to throw in the military element with the tongue in cheeky "Backlash expected if US seals arms deal"...

It seems that China did not get the answer they wanted from the Europeans and just as we said last week, swung back in favor of the US - TSYs as opposed to stocks. China 3 - Europe 0 - US 1 is the approximate score in this first round perhaps.

UPDATE: The 'game' continues into the night as China's Xinhua News cites absolutely noone when it claims Fitch's bearish stance on China's banking industry has prompted suspicions of a 'conspiracy'. And remember Fitch is French-owned.

With Europe perceiving Fitch as “purposely targeting” the region, the ratings company needs to find a new candidate to add to the “blacklist” to show its fairness, the report said, citing Wu Jingmei, head of Renmin University of China’s credit rating research center.

and then goes on to comment (via Bloomberg)

*U.S., EU SHOULD 'DITCH' PROTECTIONIST MEASURES: XINHUA *U.S., EU SHOULD 'OPEN THEIR ARMS' TO CHINESE INVESTMENT: XINHUA

and a seemingly well-time rebuttal from Ambassador Locke:

*LOCKE SAYS CHINA BUSINESS CLIMATE CAUSING `GROWING FRUSTRATION' *LOCKE SAYS CHINA POLICIES PLANTING `DOUBT' IN INVESTORS' MINDS *LOCKE SAYS CHINA SHOULD LET CURRENCY APPRECIATE `MORE RAPIDLY' *CHINA POLICY RAISES CONCERN IN FINANCIAL SERVICES SECTOR: LOCKE

We have lost score now but this rhetoric seems to be gaining pace...

