China to Europe's Rescue?
Posted by: Linda Yueh on February 16, 2012
China’s willingness to support Europe to cope with sovereign debt problems is sincere and firm.
China is ready to get more deeply involved in participating in solving the European debt issue. — Chinese Premier Wen Jiabao
Wen made these very positive statements at a joint press conference in Beijing on Feb. 14 with EU President Herman Van Rompuy and European Commission President Jose Manuel Barroso.
Unsurprisingly, Van Rompuy said at the same press conference that he welcomed the interest China has shown in investing in European sovereign bonds and the region’s rescue fund.
Wen ended the EU-China summit by confirming that China is considering more involvement in the two euro area rescue funds: the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM). This would be music to the European leader’s ears. Plus, Vice Premier Li Keqiang, mooted to be the next Premier, also said that China wants to support EU during its debt crisis when he met with Van Rompuy and Barroso.
So far, so good. But when and in what form might this help come? In terms of timing, Wen says that China expects “those highly indebted [European] countries to strengthen fiscal consolidation, cut deficits and reduce debt risks in light of their national conditions.” He added: “We hope the EU will soon reach internal consensus, make the political decision and send to the international community a clearer and a stronger message of policy responses.” Waiting for that may take a while.
Wen made clear that gaining access to European markets and enhancing trade is the most urgent issue. There may be a difference in views here in terms of what’s most pressing. As for what form the aid make take, Lou Jiwei, the head of China Investment Corp. (CIC), the country’s giant sovereign wealth fund, said that the German Chancellor Angela Merkel asked China to buy German and French government debt when she visited there in the first week of February. Sovereign wealth funds typically invest in real assets or buy equity shares, so that’s not too likely. But, the People’s Bank of China (PBOC) or SAFE (China’s foreign exchange management body) could buy government debt as part of their reserve accumulation.
Indeed, PBOC Governor Zhou Xiaochuan said, “China will always adhere to the principle of holding assets of EU sovereign debt.” The governor outlined the three avenues that could offer help: the central bank, the CIC and the banks that are arms of the state: China Development Bank, Export-Import Bank and others.
The latter, though, are more likely to invest than to buy government debt. In fact, China has repeatedly emphasized the benefits of being a source of investment at a time when Europe is facing tight credit conditions, especially for utilities, where returns are stable and thus attractive to the Chinese. (For instance, CIC invested in Thames Water.) Europe could indeed use more investment, including in infrastructure, as its economy registered the first negative quarter since 2009 when fourth-quarter 2011 GDP contracted by 0.3%. This could help, but may not be quite what the euro leaders were hoping for.
The key unanswered question is whether China could invest in the EFSF or ESM, perhaps helping to “leverage” these funds as the current cap of €500 billion is considered to be too small to serve as an effective firewall for the euro crisis. Plus, China made no indication as to whether it would increase its contributions to the IMF - that was an aim of Van Rompuy during the visit- since the IMF could serve that role.
Nevertheless, Zhou said that China has “expressed clearly” through the G-20 that it will not reduce the proportion of its investment in euro assets during the global financial crisis and European debt crisis. Maintaining the euro’s status as the second reserve currency in the world must count for something, especially as that implies purchases of euro sovereign debt, while they await possible Chinese investment in the rescue funds.
