China makes an uneasy saviour for Europe
By John Foley
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
HONG KONG — Expectations that China will help fix the euro zone are writ large as Wen Jiabao, the premier, visits Hungary, Britain and Germany. No wonder: the single currency aids Chinese exports, and buying periphery debt may help win friends on other issues. While China appears to have much to gain, the support isn’t wholly likeable from Europe’s perspective.
China has a keen interest in the health of the euro. For one thing it provides a counterbalance to the U.S. dollar. Second, it prevents member states from deliberately holding down the value of their currencies to promote exports, as China has done. The effect is marked: China’s trade surplus with the EU swelled by a third in 2010.
China’s interest in the sovereign debt of stricken euro zone countries is real enough, too. While the details of its holdings of foreign debt aren’t made public, Wen Jiabao pledged to buy Greek bonds in October 2010, and unidentified Asian buyers have taken part in some sales of European “stability facility” bonds.
This isn’t just charity: yields on European debt outstrip U.S. bonds and investors could make bundles if — if — defaults do not happen. Besides, China’s largesse may win support on other issues. A long-standing bugbear is the EU’s block on military supplies to China. The desire to lift the embargo may explain the release of imprisoned artist and activist Ai Weiwei the day before Wen Jiabao set out on his tour.
If China really wanted to help Europe out, it would look to its own currency rather than the euro. While the yuan has appreciated against the dollar over the last twelve months, it has slid 10 percent against the euro and 13 percent against the Hungarian forint. Talk of supporting the eurozone may have perversely strengthened the euro still further.
Europe would have had more leverage when China depended on it for investment capital. Now the shoe is on the other foot; China’s much needed assistance makes it harder for the Western trading bloc to push for the things that would really help — like balanced trade. Wen’s support may be genuine, but that doesn’t mean it’s entirely welcome.