China is expected to demand significant concessions, including financial guarantees and limits on what Beijing sees as discriminatory trade policies, in exchange for any investment in Europe’s emergency stability fund. The head of the rescue fund, Klaus Regling, got a cautious reply from Chinese officials Friday during a visit to Beijing, where he said he did not expect to reach an investment deal with China anytime soon.
A senior Chinese official, Vice Finance Minister Zhu Guangyao, said China — like the rest of the world — was still waiting for the Europeans to deliver crucial details on how the rescue fund, the European Financial Stability Facility, would operate and be profitable before deciding on whether to participate.
That Europe would turn so openly to China to help stabilize the debt crisis shows how quickly the Chinese economic juggernaut has risen on the world stage. Indeed, if China comes to Europe’s aid, it will signal a new international order, with China beginning to rival the role long played by the United States as the world’s pivotal financial power.
“This would be a tectonic shift,” said Pieter P. Bottelier, an expert on China who teaches at the School of Advanced International Studies at Johns Hopkins University. “It would be so important economically and politically.”
Arvind Subramanian, a senior fellow at the Peterson Institute for International Economics in Washington, said Europe’s appeal was another sign that China was already a dominant global power.
“China’s power is more imminent, broader in scope and greater in magnitude than anyone imagines,” he said. “For instance, China’s currency is already having a negative effect not just on the U.S. and Europe, but on everyone else, too. And the rest of the world can’t do anything about it. If that’s not dominance, what is?”
Europe has turned to Beijing and a handful of other emerging market economies to consider investing in the fund to supplement contributions by the 17 countries that use the euro. Outside investment was presented as critical for the Europeans to create a financial firewall of up to $1.4 trillion to prevent the debt crisis that started in Greece from ravaging larger countries, including Italy and Spain.
In a sign that the crisis was far from over and that investors were still wary of Italy’s political paralysis and its huge debt, it was obliged on Friday to pay the highest rate in more than a decade to sell a new bond issue.
The fear is that a failure to contain the crisis would lead to contagion in global financial markets on par with the Lehman Brothers debacle, and deliver a blow not only to the economies of Europe, but also to the United States and other major trading partners.
Such deterioration would certainly be bad news for China, which could hardly afford to see two of its biggest markets hobbled at the same time.
China has a $3.2 trillion nest egg in foreign reserves, by far the largest hoard of foreign currency in the world, and it needs to find places to park those reserves rather than convert them all to Chinese renminbi, a step that could set off domestic inflation and lead to sharp appreciation in the currency’s value. Europeans know that China is eager to move some of the money out of its vast pile of United States Treasury securities, and they are pushing the Continent’s crisis as a good opportunity to invest on the cheap.
Hours after European leaders unveiled their grand plan, President Nicolas Sarkozy of France called President Hu Jintao to say that Europe was still looking for some cash, and lobbied Beijing to play a “major role” in helping Europe get its house in order.
Since the Europe crisis worsened two years ago, regional leaders once wary of China’s influence have rolled out the red carpet in hopes that China might be a savior for their ailing economies.
China has already made deals to expand its footprint into choice Western European countries like Italy and Spain. Now, Chinese-owned companies run the biggest shipping port in Greece. They own highways and other crucial infrastructure, and are working to snap up other strategic businesses to anchor their presence on European soil. NYT