CHINA WANTS the European Union, its biggest trading partner, to know that it remains a reliable friend, but that doesn’t mean the world’s second largest economy is ready to become Europe’s saviour.
China’s four-trillion yuan stimulus after the global financial disaster in 2008 propped up the world economy. So it is not surprising that the EU called on Beijing last week to help beef up its bailout fund. French president Nicolas Sarkozy called his Chinese counterpart Hu Jintao to assure him of Europe’s wellbeing, while Klaus Regling, head of the European Financial Stability Facility (EFSF) visited Beijing to seek investment in the fund.
One of the very few countries with enough cash to help the EU dig itself out of its debt crisis, China has been cautious in its response. But there are compelling reasons why Beijing should, and probably will, help Europe in its hour of need. As the world’s biggest exporter, staving off collapse in a key market such as the EU serves China’s interest. China must invest its €2.26 trillion in foreign reserves, and diversify out of large holdings of US treasuries, which could mean increasing its holding of European debt – currently around one quarter of its reserves are in euro assets. China could also start buying distressed European assets, giving Beijing a valuable foothold in the EU’s economy.
In China, there is some opposition to bailing out rich countries viewed as guilty of sins of pride, avarice and sloth. Why should a developing country, where people have worked hard and saved, bail out a country like Greece, which seems unrepentant, unwilling to take the necessary pain to reduce debt, and may never pay the money back? And there is puzzlement at why China should contribute money to a bloc that includes Germany, the world’s second largest exporter.
China is keen, however, to match its growing economic power with political influence, and by investing in the EFSF, it could use its largesse to lobby the EU for market economy status under world trade rules. This would make it difficult for the EU to introduce protectionist measures against Chinese goods. China could also use any investment in the EFSF to discourage European governments from criticising Beijing’s currency policy or China’s execrable human rights record. The depth of the euro zone’s difficulties makes the prospect of Chinese assistance alluring but the EU must be careful to ensure that Beijing’s helping hand does not come at too steep a price.