Wen sets preconditions to help Europe

Wen Jiabao, Chinese premier, has called on debt-laden European countries to put their “own houses in order” before asking China for a bail-out, in a sign of Beijing’s reluctance to be cast as a saviour for the global economy.

Speaking at the opening on Wednesday of the World Economic Forum in Dalian, China, Mr Wen also publicly linked Chinese investments for the first time with long-standing political demands, indicating a possible hardening of China’s position towards crisis-hit Europe.

“Countries should fulfil their responsibilities and put their own houses in order,” Mr Wen said. “Developed countries must undertake responsible fiscal and monetary policies. What is most important now is to prevent further spread of the sovereign debt crisis in Europe.”

The debt woes of peripheral European countries like Greece, Portugal and Ireland have spread in recent months to the much larger economies of Spain and Italy, leading many to question whether the single European currency will survive in its current form.

The markets suggest a default by Greece is near inevitable and the continent could easily slip back into recession.

In this context, European countries battling sovereign debt crises have been lobbying Beijing to use some of its $3,200bn in foreign exchange reserves to buy their bonds, something that Beijing appears increasingly reluctant to do.

The Financial Times reported this week that Italian officials had met with managers of the reserves and proposed significant increases of Chinese purchases of Italian bonds, as well as a number of direct investments in Italian industry.

But there has been no indication that Beijing is willing to step in as the buyer of last resort for unwanted Italian debt, or even make the kinds of positive comments Chinese leaders have made about Greek, Portuguese and Spanish debt over the past year.

Analysts and EU officials say high-level Chinese expressions of confidence in these countries’ solvency do not appear to have been matched by large-scale purchases of their bonds, and since those comments were made the spreads on those countries’ bonds have widened significantly.

Mr Wen’s comments were echoed on Wednesday by Li Daokui, an influential economist and member of the monetary policy committee of China’s central bank, which oversees management of the foreign reserves.

“I don’t think any country can be saved by China in today’s world,” Prof Li told a panel at the World Economic Forum. “Countries can only save themselves by pushing through reforms.”

Although he reiterated Chinese “confidence” in Europe’s ability to eventually emerge from the current crisis, Mr Wen made clear China was not about to make altruistic purchases of sovereign debt without seeing anything in return.

He said Europe needed to take “bold steps” in order to receive Chinese help and the first of those steps was a decision to formally grant China full “market economy” status.

This is a technical definition that has long been a key demand from Beijing and would allow Chinese companies to avoid or at least mitigate many costly and time-consuming trade disputes.

European officials say China does not meet the criteria of a market economy and stiff opposition from some member states makes it very unlikely the European Union will grant China this status soon.