China appears unlikely to come to Eurozone’s rescue
The prospects of an emerging China stepping up to the role of global leader by becoming a major supporter of a planned $1.4-trillion European bailout fund has unsettled many in the Asian country.
They don’t think China should seal its status as a superpower by shifting its foreign trove of U.S. Treasury bonds and debts of other nations to fund the financial recovery of Greece and some of its troubled Eurozone neighbors, analysts say.
The Chinese have shied from flexing their considerable financial muscle to help Greece, where the ruling Socialists and opposition conservatives agreed Sunday to form a unity government — a step seen by many European leaders as necessary for the country to move forward with a massive bailout plan.
A successor to Greek Prime Minister George Papandreou was expected to be named Monday, followed by elections once Greece’s agreement to implement a package of loans and bailouts from European neighbors was secured.
Still, China — a country where poverty is rampant, social services are stretched thin and wages are a fraction of those in the West — remains wary.
“People’s lives in Europe are still a lot better than they are in China,” said Yang Guoying, a commodities trader in Nanjing, a city in eastern Jiangsu province. “We need to be really careful with how we use our reserves, which we built up over 30 years of reform. We can’t just put it anywhere without any conditions.”
At last week’s meeting of officials from the 20 major economies in Cannes, France, Chinese leaders also were unwilling to play savior in the shaky rescue attempt.
After two days of wining, dining and cajoling by French President Nicolas Sarkozy and other European leaders, Chinese President Hu Jintao and top aides quietly walked away.
The meek response says just as much about the limitations of China’s global ambitions as it does about the efficacy of the European plan.
“This is a moment inviting bold action, a symbolic act ultimately more important in defining China’s international place than staging the Olympics or Expo,” said Clay Dube, associate director of the USC U.S.-China Institute. But “I do not expect such bold action.... China’s leaders aren’t inclined toward such bold steps.”
China, an economic powerhouse, may have good reason to go slowly. It is, after all, still a communist nation trying to adjust to fast-changing events in a financial world dominated by democratic governments.
And it’s trying to slow its own rapid growth, defuse calls for it to revalue its currency and, especially for maintaining its grip on society, recognize the limits of what it can do internationally while keeping peace at home.
“Bailing out EU countries with Chinese money is hard for the Chinese people to accept,” Yu Yongding, a former China central bank advisor, wrote in a Financial Times editorial that has been widely shared on Chinese microblogs.
“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,” Yu wrote.
China can’t use its $3.2 trillion in foreign reserves domestically because of currency controls, but many Chinese still expect the funds to be invested wisely overseas.
On Sina Weibo, a Twitter-like microblog, nearly two-thirds of those responding to a poll opposed providing any aid to Europe. And a week before the G-20 meeting, China’s official media operation, the Xinhua news agency, signaled the country’s opposition to pledging any reserves to the debt-stricken Eurozone.
“China can neither take up the role as a savior to the Europeans, nor provide a ‘cure’ for the European malaise. Obviously, it is up to the European countries themselves to tackle their financial problems,” Xinhua said.
One reason for balking: A major political transition is coming next year with the expected retirements of Hu, Premier Wen Jiabao and Wu Bangguo, chairman of the National People’s Congress. Also, the Politburo and its Standing Committee are expected to see a large turnover.
That transition hamstrings Hu’s freedom to embark on any major policy change such as shifting massive amounts of reserves from dollars to euros.
Moving its foreign currency investments could cut into its holdings of U.S. Treasury bonds and devalue the dollar at China’s expense — making Chinese imports more expensive here and U.S. exports more attractive to Chinese consumers.
About 70% of China’s foreign debt holdings is in dollars as U.S. Treasury bills. The rest is a mixture of euros, Japanese yen and British pounds.
Beijing’s preference has been to work one on one with other countries, where it can maximize leverage by cutting bilateral commercial deals and offering loans and aid to developing countries in exchange for political support.
In international gatherings, China has sought to portray itself as a kind of balancer between the advanced and emerging countries, as well as between the developing and least developed nations, said Gregory Chin, a former Canadian diplomat in Beijing now at the Centre for International Governance Innovation at York University in Toronto.
Taking a greater leadership role in world affairs also poses the risk of diverting attention from China’s primary goal: sustaining growth.
Three years ago in Copenhagen, China dashed hopes of a global climate-change treaty after it refused to commit to carbon emission reductions that it said would have threatened its economic momentum.
Although China’s economy grew more than 9% in the last quarter, a sustained slowdown appears imminent because of persistent inflation and rising public debt.
With such political and economic concerns at home, China is more likely to offer the Eurozone a token investment, still in the billions of dollars but far short of the substantial contribution Europe anticipated. Europe is China’s chief trading partner, after all, and doing nothing would only harm Chinese exporters.
A contribution could be made through the auspices of the International Monetary Fund, an organization in which China hopes to play a bigger role because of its sway over currency policy.
As an alternative, Chinese companies could step up direct investments on the continent if Europe allows them. They already have bought auto brands MG and Volvo and propped up Saab with loans.
China’s hope is that a symbolic pledge of support for Europe — similar to promises this year to buy Spanish and Portuguese bonds — will be enough to land China some of the bigger items on its wish list from the region.
Chief among them is granting China so-called market economy status, which would remove trade barriers on Chinese goods. The country also would welcome relaxed restrictions on the sale of arms and permission for wider technology transfers.
A Eurozone leveraged by China also could minimize the effect of allies supporting a U.S. call for stronger human rights and faster appreciation of the Chinese currency. The U.S. and European countries have long complained that the yuan is grossly undervalued, giving Chinese exporters an unfair trade advantage.
“Behind closed doors, China will probably negotiate for these things, but I don’t think it will be a 100% precondition for offering financial support to Europe,” said Shi Yinhong, professor of international relations at Remin University in Beijing. “Still, China expects Europe to consider these issues seriously.”
In hesitating to become a larger global leader, China also is worried about losing control of its closed financial system too soon, said Shen Dingli, a professor of international relations at Fudan University in Shanghai.
Beijing is aware it needs reform, but it’s worried that internationalizing the yuan now would create too great a shock to the domestic economy.
“I don’t think we are a world leader,” Shen said. “We are still way behind. We can’t even exchange currency freely from the bank.”