European Union Credit Crisis

China has proven itself to be among the shrewdest in the world as it becomes increasingly well positioned. As events in recent years have shown, established themselves on increasingly powerful economic footing compared to the rest of the world. This is thanks to certain actions that the national government has pursed, one of the most important being that China has accumulated around £1.93trn (19.380trn RMB) worth of foreign currency reserves.

China has earned this money by exporting much more to the rest of the world than it imports, as China sourcing continues to offer a lucrative draw to foreign companies, giving itself one of the largest trade surpluses in the world. China’s financial arsenal includes £664bn in US treasury securities and £21.7bn in Spanish government bonds. China is fast becoming an increasingly vital global player making it incredibly formidable with its prominent and fast growing economy thanks in large part to Chinese suppliers’ exports abroad. But, as they say, “with great power comes great responsibility,” as many observers are critical of the way China has assumed this role saying that it has a responsibility to help bail out countries such as Greece and other European countries that may be facing default. In the face of such a proposition it is interesting to compare the two vastly different situations: one emerging power in the East and one fading economy in the West.

China

  • Debt – 18.9% of GDP
  • GDP per capita – £4,895
  • Unemployment – 4.3%

Greece

  • Debt – 142% of GDP
  • GDP per capita – £19,060
  • Unemployment – 12.5%

Putting the Choice into Context

The creation of a so-called euro bond, which would act as a common debt instrument much like the euro now acts as a unified currency, has been mentioned by many economists and financial experts as a possible way to help end the crisis, or at least slow a collapse. A euro bond, in principle, would have lower yields than bonds for Greece, Ireland and Portugal — the three most troubled Europe members. If these nations could refinance some of their higher-yielding debt, that could provide much needed-relief. But stronger nations like Germany have not been keen on the idea of paying higher interest rates for their debt to subsidize Europe’s weakest links.

Chinese Renminbi

Image by: Keattikorn

Despite rising calls for China to step in and help support European nations by, for example, buying bonds of the more troubled nations, as the Chinese themselves correctly point out, China is still facing economic difficulties of its own. China has increasing pressure to face the problems of inflation as they have seen the price of many stable foods skyrocket over the last year, fueling public anger and raising unrest among certain groups around the country. In addition, housing prices have tripled since 2005, leaving many people unable to afford a home and many economists worrying that China has a housing bubble that could be dangerously close to bursting, unleashing a second wave of global financial distress.

On the other side of the argument, it seems as though it would be in China’s best interest to help prop some of the European countries that are most in danger of going bust. The EU is China’s biggest export customer so without the European customers, China would be losing a large chunk of their export revenue. It seems that the real question may not be “Should China come to the rescue of Europe’s economic woes?” but rather, “How can China NOT rescue Europe?” If China were to bail out these European countries it could be mutually beneficial to both parties involved and failing to do so conversely could have severely detrimental effects.

The debt crisis across the euro zone will hurt China by sapping demand for exports, though, according to a recent article in the China World, China’s relatively small holdings of euro assets could help to limit any damage to foreign exchange reserves.
The diagnosis for the Euro’s prospects appeared in the overseas edition of the People’s Daily, the top newspaper of China’s Communist Party, in a commentary by a former central bank official and an economist for the State-owned China Development Bank.
Although the commentary in the newspaper does not reflect a definitive view from China’s top leaders, it suggests that the euro zone’s successive crises have stirred anxiety and debate in China about the impact on the country’s economy.

This official is quoted as saying:

“The euro debt crisis has now been going for nearly two years since the end of 2009, and the sovereign debt crisis has spread like the Black Death of the fourteenth century across the euro zone countries,”

This sentiment is a clear representation of the anxiety felt by even the relatively influential in China. Thus The Party finds itself in a difficult quandary as it has been left with the option of choosing between supporting governments which inspire little to no confidence by buying up their near worthless bonds or suffer the consequences of a severely depleted European economy and the subsequent decrease in demand for Chinese exports. Neither option is particularly appealing as both have serious downsides to consider.

Let us know what you think about the current situation and what you think China should do in the comments below.

  • John Allen, CPG Business Intelligence Intern

To read our other post on China and the EU crisis, check out Neil Rylander’s post, Is China the Answer to the Current EU Crisis?