The expectation that China might swoop down and rescue the euro in its hour of need is running high. Wen Jiabao, the premier, last week told a meeting of the World Economic Forum that “China is willing to give a helping hand, and we’ll continue to invest there”. But those expecting China to offer anything more than symbolic assistance will soon be disappointed.
China knows that greater eurozone stability is in its national interest. The European Union is its second largest trading partner, and a disorderly collapse in Greece and other southern European countries would have dire consequences for Europe’s economic prospects. Neither turmoil in currency markets, nor sharp changes to trade flows, nor potential moves towards greater protectionism would be at all welcome in Beijing.
More strategically, the euro’s ongoing success is vital if China is ever to escape the “dollar trap” that currently ensnares its economy. Analysts believe that two-thirds of China’s $3,200bn foreign reserves are dollar-denominated, leaving it constantly fearful of a falling dollar. China’s long-term goal is to make the renminbi an international currency, but this will take time. In the meantime, its interests are clearly served by a strong euro.
For all that, however, any more than notional support for the eurozone would come with significant political risks. China is not stupid: it can see that the deadlock over Greece is less about money and more about political will. To end the crisis every EU country, starting with Germany, must put aside its short-sighted self-interest. But with both Germany’s people and politicians so divided, this is not going to happen.
Put simply, investing in Greek, Portuguese, Irish and even Italian government bonds is now a hazardous activity. China is not going to go ahead without some form of iron guarantee from Germany and France, which seems equally unlikely.
Naturally, Angela Merkel, the German chancellor, and France’s President Nicolas Sarkozy would be delighted if China took unilateral action, but that would put Beijing in an awkward position – both risking a backlash in European public opinion and doing nothing to move towards the type of a more fiscally united Europe that, ultimately, is required to sustain the single currency.
Then, think of the money. Bailing out Greece is an expensive business: €110bn has already been spent by the EU and the International Monetary Fund, with about €120bn more still needed. Ought China really pay this amount to be a wealthy market economy?
True, it might buy some temporary friendships, perhaps to be used when another country files yet more anti-dumping charges against China at the World Trade Organisation. It would also be a public statement confirming China’s commitment to playing a more constructive role in the international capitalist system. But this, on its own, is hardly temptation enough.
Some thinkers, including CNN’s Fareed Zakaria, have even suggested that China should be bribed to help out. Ideas include offering a bigger role in the international financial system or pledging that a Chinese candidate becomes the next head of the IMF. Yet even here, China may not be ready. There is a serious shortage of qualified candidates for the latter option; the former seems improbable for a country whose currency will not be fully convertible for some time.
The most likely outcome, therefore, is that China will risk almost none of its extensive foreign reserves to rescue the euro. It may buy some small symbolic quantity of southern European bonds, as an ersatz commitment to the future of the EU. But, in the end, China is an outsider. It knows that America is retreating from European affairs, but it is not yet ready to take its place. As seen from Beijing, the euro is a European affair. And the Europeans will have to make right their own mistakes.
The writer is director and professor at the China Center for Economic Research at Peking University
China is missing a golden opportunity finally to become a world power
Yao Yang is probably right in saying that the Chinese – despite sitting on some $3,200bn of foreign reserves – are likely to keep their distance from purchasing large amounts of European bonds and coming to the rescue of the Greek economy. They do regard it as a problem arising from internal political disunity in the European Union. As Beijing sees it, the only real solution to the current crisis is for European leaders to get their acts together, show some political will, make clear that the crisis is soluble – and continue to sell unpopular bail-outs for the profligate Greeks to their own domestic constituencies.
In narrow terms, it is right for China to be cautious. But one cannot ignore this nagging feeling that China is missing a golden opportunity to finally become a world power. Bailing out the eurozone would create immense political goodwill and would drive further down the road towards the kind of world no longer dominated by the US but genuinely multipolar. It would integrate more deeply China’s economy into the global one, and might even form a kind of stepping stone to the internationalisation of the renminbi in a few years time.
The Chinese government’s mantra of focusing on domestic issues before looking to the world around it is becoming a bit tiresome now. Just as problems in China’s vast internal provinces are international because of their links to global supply chains and the stability of the country itself, so the woes of EU states are of intimate importance to China. It might get some satisfaction from seeing sanctimonious Europeans being hit by the kind of problems they once predicted for Asia. But if it looks beyond narrow self-interest, to a wider vision of its future as an international power, dealing with the Europeans on the EU debt issue makes political and, in the long-term, economic sense. Not doing so shows the same lack of political will that it berates western leaders about.
The writer is head of the Asia Programme at Chatham House, leading the Europe China Research and Advice Network (Ecran). The views expressed here are his own and do not reflect those of the EU