China makes an uneasy saviour for Europe

June 24, 2011

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.


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Posted by EU and China: trade flows and tensions – | U.S. News Network | Report as abusive

The EU has been built the wrong way. They have accepted the weak economies and they have been able to live on the work of the strong European economies like Germany, France or Netherlands. The EU had to co-operate with them instead of picking them up in the union, so that those countries could built up their economies alone. It would had allow them to depreciate their currencies during the recession and a lot of pain could have been avoided. Really, there is no logic why Greece, Bulgaria, Romania and the Baltic countries are in the EU. Croatia won’t bring any good either. A country full of bureaucracy, corruption and weak judiciary.

The ECB has now a impossible mission. If Germany continues to grow, inflation will be speeding up, while higher interest rate would hurt the PIIGS. I really cannot imagine how Europe will get out of this mess. If it does in the end, it will be a very painful trip.

Posted by DubaiUAE | Report as abusive

West has to be wary of China as the things that it needs from the West are hi-tech armaments and other strategic assets,with the surplus funds that it has acquired through its lopsided trading achieved by keeping its currency artificially low over the last decade.

Posted by cosmicinsight | Report as abusive

JF wrote: 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.
When you talk about Ai Weiwei you mixed politic and business. Chinese are too pragmatic to equate Ai’s case with geopolitics. For your information Ai was arrested for tax fraud. After his investigation with tax authority, Ai promise to payback whatever he owes to Chinese government. He is free to go, but cannot leave the country until all the money has been paid back.

Posted by armonid | Report as abusive