Why China Isn't Going to Bail Out Europe's PIGS

♠ Posted by Emmanuel in ,,, at 2/01/2011 12:12:00 AM
And now for a feature with a little help from one of my cyber-friends. Iana Dreyer should be familiar to longtime IPE Zone reader via her previous blog Global Conditions. Having now joined the European Centre for IPE (ECIPE) headed by none other than the LSE's Razeen Sally, she is now a regular at ECIPE's fine Trade Matters blog. I am late to this feature having lost touch somewhat (sorry, Iana) but she had a very informative op-ed recently in Bloomberg on why China is not likely to be the "saviour" of Europe [1, 2]. Having amassed so much in foreign exchange reserves--probably over three trillion by now by my reckoning--China has very considerably usurped the United States as the ultimate sugardaddy of the world economy. Or so they think, that is:
China is worried about Europe’s economic future. But how far is it prepared to go to ensure the euro survives the sovereign-debt crisis? Not far enough. China’s pledges to purchase Greek and Spanish bonds as well as statements of financial support for Portugal show trade and investment are at stake. After all, Europe is China’s premier export destination.

“We do have confidence in European financial markets and the euro,” People’s Bank of China Deputy Governor Yi Gang said at a briefing in London this month. “We will be here for a very long period of time. China has been a long-term, stable investor in Europe.” But while signaling a well-appreciated support for the euro, these purchases are mainly symbolic gestures. They won’t be massive, nor will they increase in any meaningful way.
The argument here--one that I fully endorse--is that China's support is mostly verbal and reactive rather than proactive. That is, China wouldn't wish for any more systemic disorder in the international monetary system stemming from perceptions that it is pulling the rug from under its purchases of euro-denominated sovereigns. However, it too isn't willing to meaningfully step up its purchases of Greek, Portugese and other "Club Med" debt.

Rather, it wants to improve its relations with these countries as members of the Eurozone that have been wary of China. (Spain appears quite Sino-friendly already.) Something not mentioned in the op-ed but is nonetheless implicit is this point: Having not moved up the value-added ladder so much, Greece and Portugal produce quite a few labour-intensive goods like textiles and clothing in the PRC's line of fire. Recall, for instance, that these two countries were the most vocal in calling for safeguard mechanisms to be invoked during the "bra wars" of 2005.

The two things China wants most of all from the EU remain the same, and warmer relations with peripheral economies should help its cause. First, it wants the EU to restrain use of antidumping measures against China made easy by its continuing classification as a "non-market economy" by the EU. The EU has been at the receiving end of China's charm offensive to be classified as a market economy before 2016 since the WTO is only obligated to change this classification 15 years after China's accession to the the trade body. And there is the continuing matter of China wanting the arms embargo on it in effect since the 1989 Tiananmen Square protests were quelled by use of force:
By buying bonds and striking investment deals in cash-strapped European companies, China is trying to make friends and build bridges. It is keen to be recognized by the European Union as a market economy. This recognition would force Europe to limit the number of antidumping cases launched by the EU against imports from China.

Building alliances with Mediterranean governments that are traditionally wary of China’s trade can help it achieve this goal. China’s display of “soft,” business-centered diplomacy may also help the Asian nation in sensitive discussions with Europe’s leaders over the EU arms embargo imposed against China after the Tiananmen Square crackdown in 1989.
Good work, Iana, and we hope to read more of your insightful writings whatever outlet you choose!