Will China save Europe from the debt dragon?
October 19, 2011

It’s not in China’s interest to interfere in the domestic or regional economic middlings of any country. The Middle Kingdom unlike her western counterparts has no ambitions of playing the red knight to rescue Europe from her financial woes, yet an economically strong Europe serves China’s purpose of a well-balanced planet.

European leaders including French President Nicolas Sarkozy who conferred with Hu Jintao and Klaus Regling, the chief of the eurozone bail-out fund have been cajoling China for support, however the nation who was under rule of Europe until a few decades ago hasn’t yet obliterated the atrocities inflicted on her history just yet.

Sure, China is willing and able to help. Since the beginning of Europe’s sovereign debt crisis, Beijing has repeatedly expressed its wish to offer “a helping hand” to Europe. Eurozone countries, however, have to understand that they will have to save themselves, China will throw them a life saver to keep them afloat, but will not pull them out of troubled waters – this they will have to do on their own.  A strong Europe is always welcomed by Beijing for geopolitical reasons. As China’s most important trade partner, a financially sound and prosperous Europe is firmly in China’s interests. Sitting as it is on US$3,200bn in foreign exchange reserves, China can help, but while it is willing to do so this will not be without conditions.

From the perspective of domestic politics, bailing out EU countries with Chinese money is hard for the Chinese people to accept. The tens of millions of elderly Chinese will demand to know why they should pay for rich Europeans to retire early when they do not have a decent pension system of their own. Unlike America, which has accumulated huge foreign debts, the eurozone as a whole has a healthy external position. This means that eurozone countries can solve their sovereign debt crisis with their own money, as long as Germany and some northern European countries are prepared to foot the bill. The Chinese people will ask: if Germans do not want to contribute more money, why should China bother?
Nonetheless, sitting on a huge treasure trove of US$3,200bn in foreign exchange reserves, China is contemplating bailing Europe out in both direct and in-direct ways. While investing in government bonds and shares in solid European non-financial and financial companies, Beijing should allow the renminbi to appreciate against the euro and give European companies greater access to Chinese markets – which, of course, needs to be reciprocated. An improved eurozone current account through trade as well as Chinese investment into Europe will free up funding within Europe and allow more savings to be directed towards governments.

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