Should China assist the eurozone in its hour of need? Yes, says the European Union which has gone to Beijing cap in hand. Perhaps, says China, mindful of the global effects of the crisis in its biggest trading partner. No, says independent economist Andy Xie.
In a note on Wednesday, Xie, a Shanghai-based consultant and writer, says bluntly that “it is not in China’s interest to participate in any European bailout scheme”, especially after Greece’s sudden announcement of a referendum. “The abrupt change [in Athens] and deepening uncertainty are warnings against any China’s involvement in European affairs,” says Xie.
Xie gives five reasons for China keeping its purse shut (with commentary from beyondbrics in italics):
First, “it won’t return well financially”. As earlier investments in Blackstone, Morgan Stanley, and Rio Tinto show, “China’s state-owned financial system doesn’t possess the capability to choose and execute foreign investments well.”
This doesn’t follow. Support for the eurozone rescue would probably involve Beijing buying bonds issued by the EU’s European Financial Stability Facility or by a special vehicle run jointly by the EFSF and the International Monetary Fund. AAA-rated and low-risk instruments, quite different from putting money into Morgan Stanley.
Second, “Europe won’t reward China politically for its assistance. Europe doesn’t treat China well.” Even though big European companies make big profits in China, European media and politic are negative towards China, complaining of losing jobs to it. “As Europe’s crisis deepens, it seems to have become more negative towards China. Indeed, China’s assistance would spark more fears towards China. It will probably [prompt a] backlash against China.”
It’s true that many Europeans are suspicious of China. But would a rescue bring a “backlash”? Hard to say. Not participating might be worse as mainstream EU leaders would then be freer to bash China.
Third, “China’s assistance would mainly weaken Germany’s position in Europe. [And] It inadvertently drags China into European politics. ”
Unclear how Chinese assistance would weaken Germany. Germany has staked much on this rescue. Failure would damage Angela Merkel, the German government, German banks and the German economy.
Fourth, “it’s not fair to Chinese people to aid Europe. Chinese people work much harder than Europeans and are paid one tenth as much. It is morally wrong for China to aid such people. And these people are so negative about Chinese. It just doesn’t make sense.”
Dead right. Beijing’s big political challenge, if it goes ahead, will be securing the support of their hard-working people. While China’s not a democracy, public opinion matters.
Fifth, “Europe has enough resources to solve its problem.” Greece’s total debt is €350 bn, compared to over €8,000bn in the eurozone’s GDP. The eurozone is roughly balanced in international trade. “It is a money distribution problem within. In terms of fiscal deficits, by Asian standard, the cuttings required are relatively small. What Asian economies did after the Asian Financial Crisis were several times as big. It just doesn’t make sense for others to help Europeans when they could help themselves.”
Dead right again. But reform of Europe is a medium- to long-term challenge. The rescue is required right now – it should buy time for reform.
Xie then lists three ways how China can “help the world and Europe” by doing things at home.
First, start the international board of its stock exchange as soon as possible – so global companies can raise money in China and China has a safe export route for its capital.
Second, China cut taxes to boost consumption, along with tolls and transport charges. The government would see its revenues fall but the benefits would go the the private sector good.
Finally, in the longer term, “China must focus on increasing technology content and quality of its industrial sector” by climbing the value chain,
These are all good ideas. But none – except perhaps big tax cuts – would have an immediate impact on China let alone the world economy.
Athens’ high stakes bet, FT Editorial
Papandreou brinkmanship may be step too far, FTMarket mayhem, FT Lex
Referendum plan faces hurdles, FTEuro in crisis, in depth, FT
Brics back to the rescue? beyondbrics
What the eurozone crisis might mean for emerging markets, beyondbrics
eurozone file, beyondbrics
Get alerts on Emerging markets when a new story is published