Over the last four months, China has been claiming that it will help Europe’s financial woes by contributing billions of dollars to the International Monetary Fund (IMF). Recently the G20 finance leaders told Europe that, if the IMF is to fortify the eurozone financial facility, Brussels has to beef it up further. Such a warning provides China with some breathing space. This article sheds light on what Chinese leaders may be weighting up before writing the check.
China’s concerns are Europe’s hopes
With European consumers less able to spend, China’s massive flow of exports into the EU market is poised to contract. It will put scores of Chinese out of work, jeopardising the very foundations of China’s social stability. The IMF’s direst projection warns that a “European economic meltdown could cut Chinese economic growth in half.” Yet, China has what it takes to prevent such a grim prospect from happening. With its EUR 2,5 trillion equivalent of foreign reserves – the world’s largest-, China is uniquely placed to mitigate Europe’s financial chaos.
Chinese leaders have long been thrilling Europe’s media by stating their intention to help bankroll the continent’s bailout fund. However, the only guarantees given so far always begin with modest considering, examining and studying. The recent G20 meeting of finance ministers and central bankers provided China’s deep pockets a welcome leeway to prolong its -ing rhetoric.
The spectre of strings attached
China has made clear that, if it is to get its hands dirty, the continent’s more indebted countries should be subject to stiff, Brussels-imposed austerity measures. When, early last week, Athens finally agreed to pass its second round of painful belt-tightening means, the ball seemed to fall in the Chinese court. By pushing the Greeks to the limit, Brussels proved that it can be as tough as China demands.
So, what else may be on the wish-list of the Chinese? It does not take much digging to work out a bunch of demands with which Beijing may be rubbing its hands. For starters, a quieter Europe towards China’s harsh treatment of human rights would, no doubt, be appreciated in Beijing. Actually, the bloody crackdown in Syria has already shifted the mischief spotlight out of China. It was China’s own –silenced- spring what generated a long standing source of friction between Beijing and Brussels, as the EU imposed an arms embargo on the Asian country following the 1989 Tiananmen crackdown. The return of Europe selling weapons to the Chinese People’s Army would soften bilateral relations a great deal. Still, Karel De Gucht, the European Trade Commissioner, assured early this month that Europe’s arms ban on China is not going to be lifted.
The Chinese would also be keen to see a relaxation of Europe’s narrative on the Chinese currency. The yuan is purposely undervalued to fuel Chinese exports, what generates large account imbalances with its trade partners. In an attempt to compete on a fairer footing in the global market, the world’s main trade actors have spent the last few years pressing China to devaluate the yuan. Brussels may have to keep a low profile in this area if it does not want to further upset Beijing.
Shada Islam, Head of Policy at Friends of Europe, recently wrote that ‘any move by Beijing on the euro would be linked to securing market economy status in the EU’. This very item embodies the elephant in the room. Although the World Trade Organization will anyways grant Beijing this distinction in 2016, bringing such a recognition four years forward would lift significant trade and investment restrictions imposed on the Asian giant. Given the eurozone’s limited room for manoeuvre, 2016 may be closer than what it looks like.
No there yet
If summits were a reliable thermometer to gauge the actual intentions of the participants, the Saint Valentine’s 14th China-EU summit did not leave much hope. The gathering greatest achievement was perhaps establishing an EU-China High Level People-to-People Dialogue. Although a welcome development, it is a world away from the kind of outcome the EU yearns for. The Chinese press statement of the meeting did not even mention the eurozone crisis. Such an omission could well have been deliberately engineered to prevent the Chinese from being held accountable if the Beijing-IMF-EU drama turns out differently.
Even if the Chinese Communist Party (CCP) comes to the conclusion that injecting financial assistance into the feeble euro is in its best interest, this decision could spark outrage among millions of Chinese – many of who are still to enjoy China’s progress. To be fair, China has got far safer ways to employ its trade surplus rather than engaging it in Europe’s uncertain firewall fund. Linda Yueh, Economics Editor for Bloomberg TV, stressed that China has repeatedly emphasized the benefits of being a source of investment in Europe, especially for utilities, where returns are stable.
As everything related to China’s inner dealings, it is hard to work out how the country’s leaders really feel about the IMF. China’s growing weight in the international arena is yet to be adequately mirrored at the world’s currency watchdog. In the scenario of China lending a hand to needy Europeans via the IMF, the country would see its say within the institution strengthened. On the other hand, the Chinese mistrust of the Washington-based organisation could well end up putting off the CCP. Zhu Min, a Deputy Managing Director of the IMF, reminded how the Chinese still remember the 1997 Asia Financial Crisis, “when the IMF imposed draconian conditionalities on Thailand, South Korea and Indonesia in exchange for structural reform loans which often caused more pain that the disease they were supposed to cure.”
The art of being fair
Even picturing the best-case scenario, there is still widespread scepticism in how China’s billions might actually ease Europe’s misery. Yet China is already helping the euro in ways that do not make headlines. Declarations like Zhou Xiaochuan’s, Governor of the People’s Bank of China, asserting that “China will not reduce the proportion of its investment in euro assets [around one-quarter of its foreign reserves]” go a long way in keeping the world’s financial markets from turning their back to the eurozone.
As the CCP’s leadership renovates later this year, the cautious mood of a party in transition trickles down all policy spheres. At last week G20 meeting of finance bosses, China – along with Japan- reaffirmed its willingness to pour billions into the IMF proven that the EU’s bailout fund is seriously reinforced. Even so, nobody should be puzzled if in the weeks ahead, Beijing displays a less determined attitude to chip in. “We match our words with our actions,” said Wen Jiabao at the last China-EU summit. If anything, the past few months have taught Europe to better not hold its breath