China/EU: It’s no surprise that China’s pledges of support for indebted trade partners come with strings. Premier Wen Jiabao, addressing the World Economic Forum on September 14, was unusually blunt about what he expected in return: to be named by Europe as a market economy. That would cost Europe little — but that doesn’t mean it should agree.
Chinese investment must look more appealing as stricken euro zone states such as Italy, Greece and Spain face up to the possibility that investors will refuse to finance their deficits. Italy’s gouging by bond markets on September 13 gives a taster. Just a drop of China’s $3.2-trillion foreign exchange reserves would give troubled countries a reprieve and help lower their bond yields.
Market economy status is, on the face of it, an easy thing to give in return. After all, it’s just a label. But, without it, countries can accuse China of dumping goods, and then use other countries’ prices — say, India’s energy prices or Thailand’s land costs — to prove their point. Under World Trade Organisation rules, China will anyway get market status in 2016, but, as Wen says, bringing that forward a few years is the kind of thing one might expect “from one friend to another”.
Perhaps. Only China isn’t a market economy — it’s a “socialist market economy”. Some important hallmarks aren’t there. The exchange rate is guided more by policy than market forces. Capital is allocated by decree rather than price alone. True, China isn’t the command economy it was under Chairman Mao. But, the suppressed rate on deposits, for example, or the inflated lending rates for small companies, show that not everything is pure supply and demand.
So, while Europe could give China what it wants — and it has flexed the “market” definition before for Russia — it’s hardly a commendable course. Far better for Europe’s leaders to get their own house in order, including planning for a Greek default and pushing Italy to cut its debt. That might sound like harder work. But, it would have the added appeal of making China’s veiled ultimatums redundant.