CHINA IS looking to see what impact the current financial crisis is going to have on its economy, just as the rest of the world is beginning to wonder if China can step in again, as it did three years ago, with measures to give a shot in the arm to the world economy.
As euro zone policymakers work furiously to contain the debt crisis, China, the world’s second biggest economy, has acknowledged that Europe has problems. Crucially, it has stopped short of officially chastising the euro zone leaders for allowing things to get to this sorry stage, and even given valuable expressions of confidence that European leaders can stop the crisis from deteriorating.
Going easy on Europe is not a given – there have been critical, if veiled, voices slamming the United States for allowing it to happen over there. China holds $3.2 trillion in foreign reserves, 70 per cent of them in dollars. But there is a sense of growing anxiety in Beijing about what exactly is going on in the euro zone.
European Central Bank Governing Council member Yves Mersch seemed to be trying to soothe precisely these Chinese anxieties when he said in an interview with the China Business News this week that no euro zone member states would be allowed to quit the currency bloc.
“Leaving the euro area is not an option for any member country,” was how his remarks translate into English from Chinese. He said it was tantamount to suicide because there were no other working currencies to fall back on.
No one knows what China’s holdings of eurobonds are, though they are said to be focused on Germany and France, and much smaller than its holdings of US debt. The Luxembourg central bank governor also said it was up to governments to work harder to keep public finances healthy, which will also help the Chinese.
“It is the responsibility of governments to bring public finances back onto sustainable tracks,” said Mersch.
Professor Huang Weiping of the school of economics at Renmin University said France and Germany continued to do well and the fact that China was still buying debt from Spain and Greece showed a certain level of confidence. Also China’s holdings of euro zone debt are relatively small. “Even if France got into trouble, the debt burden is much smaller than the US. And the way to manage risk from holding a larger amount of US debt is to put your eggs in different baskets,” he said. However, he matched this guardedly upbeat assessment with a warning. “China is not positive on the development of the debt crisis in Europe, it is highly concerned,” said Huang.
Beijing has regularly expressed its support for debt-laden European countries, because it does not want the problems to get any worse as these countries are major buyers of Chinese exports.
A weaker euro zone economy and slowing US growth would hit Chinese exports because of lower consumer spending in these areas.
So what can China do to help and offset this scenario? Three years ago, it launched a multi-trillion yuan stimulus package. This time it has two or three options open to it.
“China has room to stimulate demand in the event of a slump in growth and could also play a role in stabilising global markets. But there is less space for a major stimulus today than in 2008. As then, the immediate beneficiaries of any new spending would be commodity producers rather than the G7,” said Mark Williams, senior China economist, and Qinwei Wang, China economist, in a research note from Capital Economics in London.
“There has been no attempt to soothe markets by reaffirming China’s commitment to continue buying US debt, as has happened periodically with European debt over the past year. That said, we suspect China would be more supportive if US Treasury yields rose significantly or the dollar slumped,” they wrote.
