How China Became the European Union's Lender of Last Resort
Global markets rallied on the news that China plans to help ‘resolve’ the EU debt crisis and potentially invest in the EU’s bailout fund. However, this declaration has more political significance than economic, as it will strengthen China’s increasingly strong bargaining hand in global politics.
Premier Wen Jiabao announced that China was willing to ‘get more deeply involved’ at a press conference in Beijing yesterday. People’s Bank of China Governor Zhou Xiaochuan added that China would ‘adhere to the principle of holding assets of EU sovereign debt.' However, neither specified how much the government was willing to contribute, or in what form this assistance would be. Yet, both equities and oil rallied in hope that China would ride to the rescue to bolster global economic growth.
It is, of course, in China’s interest to aid the EU in order to support growth in the region, as the EU is one of the country's biggest trading partners. Moreover, one fourth of China’s currency reserves are already thought to be held in euros. And yet, China’s confirmation of assistance should be worrying news to investors. Sarkozy has already generated outspoken censure from the opposition for asking China for help. Some have gone as far as to call the assistance 'dirty money.' After months of hesitation and negotiation, this verification that the EU is desperate enough to resort to asking the country for help is a sign of weakness. If China does contribute to the EU bailout fund, it will be aid, not investment. Perhaps financiers need to read the extensive development discourse on aid. In short: It comes with strings attached.
The market rally will no doubt be short-lived. The form and conditions of the assistance to be provided have not yet been specified, and it is doubtful the numbers will live up to expectations. The markets' optimism is further unjustified as the EU crisis itself cannot be solved by funding. It is a long-term problem of growth and competitiveness that needs structural change, not financial assistance.
What this assistance will change in a more long-term and fundamental manner is global relations. The crisis has exacerbated the rebalancing of power between the East and the West: this aid starkly highlights the rapid shift of economic and political influence to the East. It is likely that China will rehash its demands for full market economy status in the EU, as the Premier has already noted in a speech in September last year. This will boost its exports as well as perhaps lead to EU members loosening their stance on future sanctions. The country may also ask for a greater say in IMF decision-making, further diluting the influence of the U.S. on the world-stage.
Troublingly, the aid may go some way in protecting China from harsh criticism of its environmental and human rights record. For example, the country may have just ‘bought’ its self out of some of the outrage its controversial veto in the UN Security Council generated, as Assad continues to ignore the difference between civilians and armed rebels in Syria and the country tips towards civil war. This will also give China additional bargaining power when it comes to negotiating the airline tax the EU plans to install in its attempt to extend its emission trading scheme to airlines, having already forbidden its airlines to obey this rule.
However, it is not unreasonable for China to impose conditions on aid; the West has used this as a key bargaining tool for decades in foreign policy. Additionally, the Chinese government is fully aware of the political fall-out of bailing out a region more developed than its own. Chinese bloggers have already noted China’s widening inequality divide, and that it risks angering millions that live in far worse conditions than those in the EU. The government must be able to convincingly argue its case or risk infuriating its citizens at a time of key political transition.
The EU debt crisis has exacerbated the shift of global power. The Chinese government has explicitly stated it is 'not a charity,' but it appears that the EU has been left no choice, after months of fruitless negotiations. It is China, and not the ECB, that has turned out to be the lender of last resort.
Photo Credit: Wikimedia Commons