Would a Chinese Bailout of Europe Be Worthwhile?

November 4, 2011 Posted by China Briefing Reading Time: 3 minutes

Nov. 4 – Political leaders are meeting at the G20 Summit in Cannes, France between November 3 and 4, and this year’s topic attracting the most attention is, of course, the European Debt Crisis. While one of the major questions being floated at the two-day meeting is “Will China help Europe or not?” – the most important question being asked by the Chinese side is, “Would rescuing Europe truly be worthwhile?”

With US$3.2 trillion available in its foreign exchange reserves, China’s hesitation to offer help may sound a bit selfish from the European perspective – after all, as China’s largest export market, Europe has been a significant contributor to that huge pool of foreign exchange reserves. However, for China, it makes complete sense to weigh on its investment decision into Europe and figure out exactly what it will get in return.

Chinese Vice-Finance Minister Zhu Guangyao has recently said it was “too early” to discuss further bond purchases from the European Financial Stability Fund (EFSF), the rescue facility which was expanded to EUR1 trillion (US$1.32 trillion) under an agreement last week. More “clarity” on the revamping is needed, Zhu emphasized.

Zhu’s statement shows that Beijing clearly needs more time to assess the backdrop and outlook of the EFSF, even though it is still rated AAA by three main rating agencies. For the record, the three bonds already issued by the EFSF this year have performed miserably, and the future remains unclear due to a lack of thorough understanding on how the EFSF’s proposed partial guarantees against losses will actually work.

In addition to an evaluation of the fund the potential Chinese investment may go to, there are more issues for China to take into consideration and the country knows full well how to maximize public diplomacy results through offering international financial support. For example, if and when China decides to lend a hand, will Europe also back off on the country’s human rights issues and other controversial political issues? There is no definite answer for the Chinese decision-makers yet, but they have been seeing some “friendly gestures.” A report published by the European Council on Foreign Relations this year specifically mentioned that Hungarian Prime Minister Viktor Orbán brought up no political concerns but the idea of building “new alliance of major significance” with China when Premier Wen Jiabao visited in June. Orbán also declined to meet the Dalai Lama when the former Tibetan leader visited Hungary in 2010.

Of course for people inside China who are not so familiar with those political issues, what is more important is what economic benefit China can get in return. A recent editorial on China’s Global Times argues that, in return for China’s cash, the EU should further open their markets to China and finally admit the country’s market economy status, which will give Beijing better protection against penalties and make it harder for the EU to levy special tariffs on inexpensive Chinese imports.

A positive sign in the granting of this long-awaited status was already released earlier this year by the U.K. Chancellor of the Exchequer George Osborne, who said the United Kingdom would push for China to receive full market economy status from the EU before 2016.

Closely associated with China’s economic interests is the West’s criticism of the country’s local currency exchange rate. While a draft of the G20 communiqué, leaked over the past few days, calls on China to allow more flexibility in the yuan to help ease global trade and investment, China showed reluctance to include this in the final communiqué. The British newspaper the Guardian, which reported the incident, labeled it as a factor that has “complicated” Europe’s search for Chinese funds.

In short, there is no free lunch in the world. China holds its own interests and will not take a major risk just to play philanthropist to the West. Europe, on the other hand, will have a weaker approach – both politically and economically – towards China if it cannot stand on its own feet. Therefore, it is not only a question for China to ask “Is rescuing Europe truly worthwhile?” – it is also a question for Europe to ponder whether it is worthwhile to completely count on China for the bailout.

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