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A friend in need

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Wei Gu
Last Updated : Jan 20 2013 | 2:39 AM IST

China has good reason to help bail out Europe, and without attaching strings. Premier Wen Jiabao suggested last month that a pledge of Chinese funds might depend on certain benefits, such as Europe granting the country “market economy” status. But as the biggest beneficiary of global trade, it is in China’s interest to do whatever it takes to help the euro zone return to stability.

China surpassed the United States in July to become the European Union’s biggest trading partner, according to the EU’s statistics office. At that time China also supplied 17 per cent of Europe’s imports, more than any other country. With U.S. lawmakers debating whether to impose tariffs on Chinese exports, China depends more than ever on sustaining its exports to the EU. Struggling Europeans will buy less from China, and may be more inclined to join the United States in looking for a scapegoat to the East.

Beijing has already bought bonds issued by the triple-A rated European Financial Stability Facility. But that’s not enough. French President Nicolas Sarkozy was due to speak with his Chinese counterpart on October 27, while the head of EFSF was set to travel to China the following day. Both may ask China to invest some of its $3.2 trillion of foreign exchange reserves in a special purpose vehicle for distressed debt.

Weak as the EU’s position is, Beijing might struggle to get extra goodies. China may prefer to scoop up ports and resources directly, but that option isn’t currently up for grabs. Market economy status is unlikely to be forthcoming either, since China isn’t a market economy. If China pushes too hard, euro zone countries may just be decide to dig in, devalue the euro and help themselves out.

Besides, offering no-strings help will benefit by buying Beijing some time. China is already shifting its economy away from exports, cutting its current account surplus from 5.2 per cent of GDP in 2010 to 2.8 per cent in the first half of 2011. But slow and steady is the preferred way. If Europe can be spared a sudden and sharp rebalancing, then maybe its biggest trade partner can too.

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First Published: Oct 28 2011 | 12:41 AM IST

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