The meaning of euro crisis for China
Chinese Prime Minister Wen Jiabao offered China’s support for Europe and its common currency amid the Euro zone’s debt crisis on Saturday June 25. Wen said China is a long-term investor in the European sovereign debt market and has purchased a “not small” amount of euro denominated bonds in the past years: “China will consistently support Europe and the euro,”[i] said Wen who was accompanied by Hungarian Prime Minister Viktor Orban. While in the U.K. Wen met with Prime Minister David Cameron for an annual dialogue and oversaw the signing of a series of governmental and business contracts.
A recent report by Standard Chartered Bank said that Beijing appeared to be buying fewer American assets that might be a possible sign that China was pushing more money into European bond purchases.
The International Rating Agencies reduced the Sovereign Credit Rating of Greek which previewed the crisis of this country, and then, Portugal, Italy and Spanish were also put on the list. Soon the crisis became widespread in the area. The crisis all over Europe derived from the internal debts of those European governments.
China has attempted to support Europe. However, it may fall short for a long-term solution of euro crisis. China is seeking to diversify its foreign investment and reduce its reliance on US bonds in the long-term, but it is likely not to take the risk of buying significant amounts of Greek or Portuguese bonds, said Marie Diron, head of European macro services at the UK-based consultancy Oxford Economics.
The truth is, however, China doesn’t have enough capacity to further its investments in European sovereign debt market which has the possibility to drag China into another dilemma since the investment of American government bond has caused shrinking of the China’s asset.
Helping the Europe, investing in the European debt market to save the euro, in somehow, can benefit China. China’s decision-makings on financial issues could depend on some political economy reasons, as pointed by Robert Keohane and Joseph Nye in 1970s[ii]. China still can gain something from that intertwined complicated and paradoxical contexts of global economy.
China’s financial dilemmas are connected with the pursuit of getting out of the overdependence issue on the US dollar. It’s also interconnected with the trade balancing issue with the United States. It’s, too, intertwined with the diplomacy issues as well as in the case of the recently further intensified South China Sea dispute due to the US’ involvement.
In order to reduce the negative affluence from the dollar depreciation, China has few alternatives but turning its attention to the European debt by way of further investments in Europe. Paradoxically the euro crisis, in coincidence with the Chinese needs to diversify its investments other that US bond market, pushed China further close to European market. This strategically politico-economic decision was made even if the US/Europe-made so-called “human rights” issues which has hindered China-Europe relations from furthered are still at stake.
The United States intervened in the South China Sea issues since one of the new “Return to Asia” strategies of Obama administration was formally pronounced by Hillary Clinton in 2009[iii]. For example, the U. S. supports Vietnam and the Philippines for an obvious reason as the disputes between China and those countries broke out these days. China should be able to find some alternative courses in order to distract the attentions from the present South China Sea disputes by making relationships with European countries much smoother.
But it’s still uncertain how China’s economic relations with Europe should be finalized. During Wen’s visit to Europe, China seems apparent to avoid the fluctuation issues by signing long-term contracts with European countries since its uncertain if those incoming new governments in some of the European countries would continue to honor the contracts their predecessors have signed with China.
China has so many economic issues of its own such as inflation, housing (bubble) price, big living standard gap between coastal cities and the rural areas in the West, public security issues, etc., it would be hard for Chinese surplus financial assets to be spent out somewhere for somebody all the time.
The costs which might come from the mistakes could be far beyond the benefits gained from the investments in Europe today.
The United States would not like to see a scenario if China-Europe relations got further close and trusted each other from the continued Chinese roles in the long-term solution of the euro crisis, which will surely further threat the hegemony of America in its already troubled European relations. It’s easily predictable for one to imagine US will try whatever it can to prevent this scenario from becoming a reality.
[i]The ASSOCIATED PRESS, “On European Visit, Chinese Leader Offers Support” , http://www.nytimes.com/2011/06/26/business/global/26euro.html
[ii] Robert O. Keohane and Joseph S. Nye, “Power and Interdependence”. Cambridge University Press, 1977.
[iii] The details can be found in Dan Twining, “A U. S. Asia strategy for Hillary Clinton’s Trip”, http://shadow.foreignpolicy.com/posts/2009/02/15/a_us_asia_strategy_for_hillary_clintons_trip
Yang Jingmin is an editor of M4.cn and can be reached at email@example.com