China wonders ‘will Europe pay us back?’

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China is nervous about its decision to buy European bonds to alleviate the sovereign debt crisis, and is linking it to the country's continued support for reforming global governance in its favour, EURACTIV has learned.

Speaking at the annual Rhodes Forum last Saturday (8 October), an influential Chinese policy adviser told delegates: “Whether China should provide further support for the Euro has already become a hot topic not only in Europe, but also in China.”

Zhang Haibing, deputy director at the Shanghai Institute for International Studies centre of world economy – which provides the Beijing government with policy briefs – said that China was in two minds on the matter.

“One says we should support it because we have no choice – Europe is too big of a partner. But on the other hand, some say we shouldn’t support the European Union in its debt crisis.”

China is afraid of being ‘trapped’

According to the Chinese analysts, critical voices in the government proned caution. “We are already in the trap of the US dollar, and [the question arises] whether we should jump into another trap of the Euro,” she said.

Zhang subsequently spelled out priorities of China’s strategic thinking, clearly indicating that Beijing is demanding reform of the global governance system to give itself more clout.

She said the global governance system “is not in our favour” calling for a model in which there would be “negotiated orders not imposed orders, which means each national economy having the right to contribute.”

“The question is will you pay us back?” a Chinese government source told EURACTIV yesterday (12 October), asked about nervousness in Beijing about investment in European bonds.

“Europeans must understand that hardworking families in China have little conception of these sums,” the source said.

It is much harder to convince the Chinese people we should help Europe, when the West fingerpoints China's refusal to revalue the Renmimbi, the source added.

Asked if Europe would repay China, a Commission official said: “It’s the whole world that is looking at the EU and our response to the current crisis[… ] there are clearly high expectations among our international partners, including China, whose economy has strong ties with the EU and the euro area.”

The official added: “We must provide a comprehensive response to all these interlinked challenges. We acknowledge that there are concerns among all our partners, not just China.”

Grassroots arguments appeal to ordinary Chinese

The Chinese government source said that the critical voices were using “grassroots” arguments, a buzzword for attempts within the communist party to reflect more fully the views of ordinary Chinese.

Elsewhere at the Rhodes forum – which was funded by Russian railway manager Vladimir Yakunin – there was heated debate about the extent to which the Euro is coming under pressure.

Italian economist Paolo Raimundo said that there was a clear “speculative attack” against the currency. He said both European and US banks were responsible for this, but said that the underlying reasons related to the shift away from the dollar as the world’s reserve currency.

He called for a European economic defence ministry to be set up at short notice to take political steps necessary to stem speculation.

Meanwhile his compatriot, professor Domenico Nuti, said that sovereign debt default may be the necessary exit from the crisis. He said such a default would be costly, “because it involves the cost of recapping banks on a larger scale including the central banks”.

The price of not defaulting could be costlier, however, he told delegates: “Look at the losses in the EU stock exchanges, it is a tax on the rich but not only on the rich, but it doesn’t benefit the governments.”

“The Europeans must understand that hardworking families in China have little conception of these sums. They work very hard and are frugal and save. They find it difficult to accept that the Chinese – who receive only four dollars for each iPhone that is sold in the West – should now be spending such sums. It is much harder to sell to them when there is finger pointing from the West in relation to Chinese refusal to revalue the Renmimbi,” a diplomatic source told EURACTIV.

 "We are dealing with different urgent situations: Greece, other European sovereign issues, fragilities in the banking system... We must provide a comprehensive response to all these interlinked challenges. We acknowledge that there are concerns among all our partners, not just China,” said a Commission source.

“I think it was Lenin who said there is no such thing as a situation without an exit," said Italian professor Domenico Nuti, of Rome’s Sapienza University. “There is always an exit and the exit that there is, and that we may have to take although we don’t really like it, is to let sovereign debts default when they become insolvent."

According to Nuti this is costly because it involves the cost of recapping banks on a larger scale including the central banks, but even non-default can be very costly, he said.

"Look at the losses in the stock exchanges in the last three or four months of the order of 25-30% or more, it is quite a tax on the rich but not only on the rich, but it doesn’t benefit the governments,” Nuti concluded

“The fact that there is an attack is clear by a number of indications: Goldman Sachs says reduce investment in Europe, the US do not give credit lines in dollars to the EU banks because they are exposed to the Greek debt, but compare the Greek debt crisis to the debt of AIG [the US insurer] – which lost $480 billion overnight, and we are talking about a debt crisis in Greece and Europe?” Italian economist Paolo Raimundo told the Rhodes Forum.

In September, China’s government indicated it was willing to buy bonds issued by debt-burdened European nations, reinforcing a stance taken by Premier Wen Jiabao.

The comments were made by Zhang Xiaoqiang, vice chairman of the National Development and Reform Commission.

A number of European economies are facing a funding crunch.

China, the world's second largest economy, has more than $3 trillion (£1.9tn) in foreign exchange reserves.

Zhang underlined China's willingness to use that cash to prop up Europe's creaking economies.

"For the countries experiencing sovereign debt crisis, we are willing to lend a helping hand... to buy some of their bonds," Mr Zhang explained.

At present the biggest risk is faced by Greece, with many analysts claiming it is only a matter of when, rather than if, it defaults on its debt obligations.

The worry is that the problems in Greece will destabilise the global economy, hurting both China and Asia as a whole.

A huge volume of exports from China and south-east Asia arrive in Europe,  and a break up of the euro would be a catastrophe for Asia.

  • 23 October: Eurozone and EU Council summit

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