All eyes will be on China at this week’s G-20 meeting in Cannes. The expectation—or at least the hope—is that Beijing will contribute to Europe’s bailout fund, the European Financial Stability Facility. The Greece-rescue plan announced on Thursday in Brussels calls for an increase in the size of the EFSF from 440 billion to a trillion euros.
At the press conference announcing the deal, French President Nicolas Sarkozy said that the EU would like support from Beijing, and he called his Chinese counterpart, Hu Jintao, to ask for help. EFSF chief executive officer Klaus Regling immediately flew to Beijing and held consultations with officials late last week.
In response to the overtures to China, President Hu praised Sarkozy and European leaders for showing “determination” but did not promise support for their plan. Then, Zhu Guangyao expressed Beijing’s reluctance after meeting with Regling. “We need to wait for the technicalities to be clear and also to carry out serious studies before we can decide on investment,” the finance vice-minister said.
Finally, Xinhua News Agency ran a commentary today explaining Beijing’s position. “Amid such an unprecedented crisis in Europe, China can neither take up the role as a savior to the Europeans, nor provide a ‘cure’ for the European malaise,” the official organ stated.
There are many reasons for Beijing not to support Europe. First, Thursday’s plan is obviously just another temporary fix. There were “comprehensive” and “final” plans announced this March and July, and it may be only months before European leaders will need to come up with still another one.
Second, the Europeans are not pledging their own resources. After all, they merely said that the EFSF would be “leveraged,” in other words, eurozone leaders will be looking for others to chip in 560 billion euros. They refused to commit their own cash or even issue sovereign guarantees.
Third, Europe does not need China’s money. The continent is capital-rich and a net exporter of capital. “The reason peripheral European governments cannot get financing is not because there is a lack of capital or liquidity,” explains Peking University’s Michael Pettis. “They don’t need Chinese capital. They need someone foolish enough to lend money to countries that probably won’t repay.”
Chinese leaders are undoubtedly looking for ways to avoid throwing good money after bad. Yet, directly or indirectly, they will end up “buying rubbish bonds” and committing funds to the EFSF.
Why? Because Europe is bailing out China as much as China is bailing out Europe. Maybe even more.
For one thing, perhaps as much as a quarter of China’s $3.2 trillion in foreign exchange reserves is in euros, the result of Beijing’s ill-conceived goal to lessen dependence on the greenback. Therefore, it should come as no surprise that Chinese central bankers have already invested in EFSF bonds that were issued to support Ireland and Portugal. As a practical matter, China will do what it can to make sure its existing euro investments do not precipitously fall in value.
And there is an ideological reason for China to support the eurozone. Beijing has long wanted to undermine the status of the dollar as the world’s reserve currency and so cannot let an alternative to the greenback break apart.
Most important, the EU is China’s largest export market, and falling orders from the continent have caused severe problems in China’s coastal manufacturing centers. Failing Chinese factories, however, are a symptom of a far larger problem: Beijing has yet to develop sufficient internal consumer demand and thereby put the Chinese economy on a sustainable basis.
Until it does so—and that will be a long time as the central government is still pursuing policies that depress consumption—China will be dependent on state investment and exports to create growth. As central technocrats run out of flexibility to invest their way out of the current predicament, China will become even more dependent on exports. And as China increasingly relies on exports, it needs Europe to continuing buying its goods. Therefore, Beijing must throw Europe a lifeline so that Europe can throw one back. China needs to accumulate euros and keep the euro in existence if Europe is to continue buying from Chinese exporters.
Europe’s problem is much the same as America’s: Beijing has been pursing predatory trade policies that have created global imbalances, like the Chinese trade surplus and trade deficits elsewhere. Those imbalances will inevitably be unwound, and Chinese leaders want Europe and the United States to bear the pain of this adjustment. To prevent the Europeans and the Americans from taking meaningful steps to force China to accept its share of the adjustments, Beijing has recycled export receipts back to Europe and America in the form of loans so that they will continue purchasing Chinese goods—and thereby accept ever larger trade deficits.
At the moment, European leaders are looking for other people’s money. Outside money, however, will merely delay the restructuring in Europe—and in the global economy—that must eventually occur. When Xinhua tells us the current crisis is Europe’s problem, it is only half right. It is China’s as well, even more so because the Communist Party depends more on growth than Europe’s leaders for legitimacy.
When Europe fails to tackle its own fundamental problems—it needs growth not a bailout argues Tsinghua University’s Patrick Chovanec—it is postponing the need for economic restructuring in China as well. So we should not talk about China rescuing Europe. If anything, China, by delaying a solution in Europe, is making the continent’s—and its own—problems bigger.
- ABSURD: The EFSF Considers Issuing Yuan-Denominated Bonds (businessinsider.com)
- Europe bailout fund chief visits Beijing (seattletimes.nwsource.com)
- EU to China: Lets make a deal (theglobeandmail.com)
- China could play key role in EU rescue (cnn.com)