No Help from China for the Eurozone

Europe is providing China with another golden opportunity to present itself as a savior of nations, or even the world economy. But China cannot and will not go where Germans fear to tread. Nor does Europe actually need China – notwithstanding the columnists at Bloomberg and other news agencies which quote their clients as preferred news sources.

Premier Wen Jiabao called on Europe to put its house in order before asking China for a bail-out. Italy’s prime minister took time out from pleasure-hunts to seek to persuade the managers of Chinese foreign exchange reserves to buy its bonds at a time when Italian debt risk has been rising. In the past China appeared to win European friends by commenting positively on the Portuguese and Spanish bonds while not putting much of its money into buying their bonds. Now China is playing hard to get if it is to come to the rescue by acting as a lender of last resort for the beleaguered members of the Euro system. In particular it wants restrictions on exports of high-technology equipment ended, claiming that this would make a significant difference to western export prospects. Other countries with large foreign exchange reserves including Russia and Brazil are watching to see if they can use their own large levers for political or economic advantage.

The reality, which the Europeans themselves forget but which China knows full well, is that the Eurozone as a whole has no need of Chinese, Russian or anyone else’s money. This is not the United States with a huge foreign debt and continuing $450 billion annual deficit on its overall trade. Euro-land is roughly in external balance and most of its governments’ debts are held within the Eurozone rather than by outsiders. The European crisis is a political one of its own creation, resulting from the unwillingness of the strong to support the weak. No amount of Chinese buying of euro debt will make a difference if Europe is unable to resolve this internal problem. China is not stupid enough to buy the debt of the weaker countries if there is any likelihood that the Euro area will shrink ,leaving them with devalued debt in resurrected Drachmas and Escudos.

But nor does China want a weak euro. Indeed the euro’s relative strength over the past year despite its various national debt problems has been to China’s advantage. Despite a small appreciation against the US dollar, the Chinese yuan is exactly where it was a year ago against the euro and until the past few days of currency turmoil was well down against most Asian currencies and those of commodity exporters such as Australia. The gains of non-US currencies have been partly a result of China’s desire to diversify its reserves and to ensure that the yuan does not rise against them

As Europe and the US both appear unattractive locations for foreign exchange reserves there is much talk of the yuan becoming used in international reserves and for trading purposes. London soon hopes to be recognized by Beijing as an offshore centre for yuan trading. But so long as China fears a free market in its own currency, for nationals as well as foreigners, the yuan will remain tightly controlled, kept artificially weak and its use in trade mainly confined to China’s immediate neighbors.

China is often seen as actual or potential savior of the world economy thanks to its rapid growth and ability, as at the time of the 2008 crisis, to stimulate demand by official decree. Its role has been on balance positive, particularly for commodity producers who have seen prices rise rapidly thanks to Chinese demand. But China’s huge trade surplus acts as a drain on other economies, which they reasonably resent. And China also receives far more direct investment from overseas than it makes which partly explains why its economy is flourishing while Europe, the US and Japan stutter. China should be thankful.

Nor do the other BRICS – Brazil, Russia, India -- hold out much prospect for China in the short term. All are keen to stop becoming so dependent on exports of raw commodities, all are anxious to stem the flood of Chinese manufactured exports which are hurting their less competitive industries. Brazil has just imposed additional tariffs aimed mostly at China and cut interest rates to weaken its currency and dampen imports.

In short, Europeans need not only to get their act together. They need to wise up to China, treat it with respect but not awe born of ignorance. And China needs to act on the fact that unless it stimulates consumption at home rather than rely on excessive and low yielding investment for growth it will have no alternative but to go on accumulating the currencies it claims to despise, the dollar and euro.