The head of Europe's rescue fund sought to entice China yesterday to invest in the facility by saying investors may be protected against a fifth of initial losses and that bonds could eventually be sold in yuan if Beijing desires. SCMP, Oct 30 The excerpt above tells me two things about Klaus Regling, the chief executive of the European Financial Stability Facility. The first is that he has never sat in a dealing room as a salesman of stocks, bonds or any other financial instrument. The second is that he is one of those economists who can say the words but can't sing the tune. Think for a moment what your reaction would be if your broker called you up and said, 'Listen, I got an investment idea for you. This stock is going straight down but don't worry, the company itself will cover a fifth of your losses, well, may do so, that's the operative word, but we haven't worked it out for sure yet.' What you would of course say to your broker is, 'Thank you very much. I'll think about it.' You would then quickly push the red button on your phone and immediately enter the number for another stockbroker - 'Hey listen, there's a stock I want you to short for me, every cent you can lend me on this one.' What salesman have you ever encountered started his pitch by describing his offering as a loser? No, it's definite. Regling has never seen the inside of a dealing room in his life, that's plain. In fact, I doubt he has ever made a sale of anything in his life. There can certainly be no doubt of it being a loser. Think again of what is likely to be the future of a company that promises to cover the losses of investors in its stock while these investors keep their winnings. Leave alone that this is probably illegal anyway, the company will soon be unable to keep its promises. It will go bust, just like the European Union will be if it keeps coming up with silly ideas like this. And then we get to the other silly idea. This one is that EFSF may seek to help rescue Europe's finances by selling China rescue bonds denominated in yuan. I think someone should suggest to Regling that he looks up 'balance of payments' in the economics textbook that he was meant to have memorised in his first year of economics studies, but that he obviously never opened. Follow it through. The EFSF sells yuan bonds by which it raises yuan. It then takes this money to Greece and says, 'Here, help yourself' to which Greeks say, 'Yes, but what do we do with this stuff? It's yuan. All we can do with it is buy toys from China, which we already do, or invest it in China, which we don't want to do.' I can guess at Regling's solution to this predicament - Let the Greeks sell the yuan to someone else in exchange for euro and then they will have the euro they want. Brilliant, Klaus, but then this someone else, who might otherwise be tapped for the necessary euro, no longer holds any. He holds yuan instead. The overall pool of euro has not grown. Why then go to China for that rescue money (and have to promise to cover losses) when the money is already available on normal market terms nearer home? But in fact all of this represents a misunderstanding of the true state of affairs. Regling does not have to denominate his EFSF bonds in yuan. China has something better. It has an abundance of euro. Quite how much that is I don't know because the figures don't give a full breakdown, but the EU's own figures show that its balance of payments with China runs in China's favour to the tune of more than Euro100 billion (HK$1.09 trillion) a year at the moment. This says that Beijing cannot avoid helping Europe with capital infusions. Just as there is not much use for yuan outside of China, there is not much use for euro outside of Europe. China's big surplus on the balance of payments all goes back to Europe, either directly or through someone else's pocket if China would rather hold its foreign reserves in other currencies. I can understand why Beijing has said nothing about Regling's sales pitch. How do you reply to such confusion? Their own dim understanding of these matters is brilliant perception compared to his.