A day after European leaders unveiled their latest plan to save the euro, top officials opened talks with China in an effort to lure tens of billions of dollars in additional cash, giving China perhaps its biggest opportunity yet to exercise financial clout in the Western world.
China is expected to demand significant concessions, including financial guarantees and limits on what Beijing sees as discriminatory trade policies, in exchange for any investment in Europe's emergency stability fund. The head of the rescue fund, Klaus Regling, got a cautious reply from Chinese officials Friday during a visit to Beijing, where he said he did not expect to reach an investment deal with China anytime soon.
A senior Chinese official, Vice Finance Minister Zhu Guangyao, said China - like the rest of the world — was still waiting for the Europeans to deliver crucial details on how the rescue fund, the European Financial Stability Facility, would operate and be profitable before deciding on whether to participate.
That Europe would turn so openly to China to help stabilise the debt crisis shows how quickly the Chinese economic juggernaut has risen on the world stage. Indeed, if China comes to Europe's aid, it will signal a new international order, with China beginning to rival the role long played by the United States as the world’s pivotal financial power.
“This would be a tectonic shift,” said Pieter P Bottelier, an expert on China who teaches at the School of Advanced International Studies at Johns Hopkins University. “It would be so important economically and politically.”
Arvind Subramanian, a senior fellow at the Peterson Institute for International Economics in Washington, said Europe’s appeal was another sign that China was already a dominant global power.
“China’s power is more imminent, broader in scope and greater in magnitude than anyone imagines,” he said. “For instance, China’s currency is already having a negative effect not just on the US and Europe, but on everyone else, too. And the rest of the world can't do anything about it. If that's not dominance, what is?”
Europe has turned to Beijing and a handful of other emerging market economies to consider investing in the fund to supplement contributions by the 17 countries that use the euro. Outside investment was presented as critical for the Europeans to create a financial firewall of up to $1.4 trillion to prevent the debt crisis that started in Greece from ravaging larger countries, including Italy and Spain.
In a sign that the crisis was far from over and that investors were still wary of Italy’s political paralysis and its huge debt, it was obliged on Friday to pay the highest rate in more than a decade to sell a new bond issue.
The fear is that a failure to contain the crisis would lead to contagion in global financial markets on par with the Lehman Brothers debacle, and deliver a blow not only to the economies of Europe, but also to the United States and other major trading partners.
Such a deterioration would certainly be bad news for China, which could hardly afford to see two of its biggest markets hobbled at the same time.
China has a $3.2 trillion nest egg in foreign reserves, by far the largest hoard of foreign currency in the world, and it needs to find places to park those reserves rather than convert them all to Chinese renminbi, a step that could set off domestic inflation and lead to sharp appreciation in the currency’s value. Europeans know that China is eager to move some of the money out of its vast pile of United States Treasury securities, and they are pushing the Continent's crisis as a good opportunity to invest on the cheap.
Hours after European leaders unveiled their grand plan, President Nicolas Sarkozy of France called President Hu Jintao to say that Europe was still looking for some cash, and lobbied Beijing to play a “major role” in helping Europe get its house in order.
Since the Europe crisis worsened two years ago, regional leaders once wary of China’s influence have rolled out the red carpet in hopes that China might be a savior for their ailing economies. China has already made deals to expand its footprint into choice Western European countries like Italy and Spain. Now, Chinese-owned companies run the biggest shipping port in Greece. They own highways and other crucial infrastructure, and are working to snap up other strategic businesses to anchor their presence on European soil.
But with Europe’s economy verging on its second recession in three years, Chinese officials are wary of taking too big of a risk abroad. China's own economy is slowing, and there is growing unease about inflation and a property bubble. The income gap between the rich and the poor is widening, posing challenges to the leadership in Beijing.
Chinese citizens have also been venting anger on the Internet about government investments in Europe that have turned out to be anything but profitable, including billions of euros worth of volatile bond holdings from stricken countries like Spain and Greece. And on a per capita basis China is still much poorer than Spain, Greece or Italy, meaning officials in Beijing could face a popular outcry if they poured resources into rescuing European countries or banks.
“There is a lot of skepticism within the Communist Party, but also in Chinese public opinion, about China sinking money into European reserve assets,” said Jonathan Holslag, the head of research at the Brussels Institute of Contemporary China Studies.
Still, lending a hand to Europe could prove a golden opportunity for China to increase its financial and political clout, and make it more of an equal among giants on the Continent, analysts say.
Although leaders have pledged not to tie political demands to financial investments, Beijing has sought to get the European Union to recognise it as a market economy under global trade rules.
Without that status, it is easier for other nations to initiate trade proceedings against China.
China is also eager to persuade Europe to drop its criticism of its currency valuation policies, especially at a time when the United States Congress is weighing legislation that would allow American companies to file trade cases against China on the basis of an undervalued renminbi.
Another longstanding sore point is the arms embargo that Europe and the United States imposed on China after its bloody 1989 crackdown on protesters in Tiananmen Square. The European Union recently considered easing the ban, but the United States has steadfastly objected. More than anything, lifting the ban would signal Europe's acceptance of China as an equal on the world stage.
It is not clear whether China would push that hard, though. As much as Europe wants the cash, Beijing knows that taking things too far could backfire.
"When you look at the diplomatic agenda, most officials understand that trying to impose political conditions on financial support is not going to work, and might even be counterproductive," said Mr. Holslag, the Brussels Institute researcher. "If they become too blunt and assertive in attaching a lot of demands, that might lead to a defensive, if not protectionist, stance in Europe."
Moreover, Europe is China's largest export market, so it may be in Beijing's interest to help boost European stability, said an official close to the Chinese government's deliberations although not directly involved in them.
If a contribution is made to the European stabilization fund, he said, it is likely to be sizable, although smaller than those by the biggest European countries or the International Monetary Fund. What would be crucial, he said, is that Germany, France and the European Central Bank are behind the plan to expand the fund.
"We are looking at China's pile of reserves with envy, and hope the Chinese are willing to spend something on us," said Paul de Grauwe, an economics professor at the University of Leuven in Belgium and an adviser to the European Commission. "But they surely don't want to throw money at this except if they get an ironclad guarantee. If that doesn't happen, I don't think we should count on China to help us out."
©2011 The New York
Times News Service
