China Flexes Its Muscle in Europe

11/16/2011 9:45 am EST

Focus: GLOBAL

Jim Trippon

Editor-in-Chief, China Stock Digest

As the European debt crisis has moved media attention from Greece over to Italy, at least temporarily, many of the players and observers have been eagerly seeking out China all along, writes Jim Trippon of Global Profits Alert.

China matters, and China’s opinion matters.

There is a certain practical wisdom in this, as China is not only regarded rightly as the new economic power still growing at the pace of a speeding rocket—with growing influence to match—but China is also an investor-read creditor, should it come to that, for much of the world—and certainly for Europe.

Many voices have spoken from China regarding Europe’s troubles. Chen Deming, China’s trade minister, addressed the Eurozone troubles recently in Vienna.

In comments to the Austrian press, Deming promised active support from China for Europe. Deming spoke of all countries needing to stick together while Europe recovers.

There was no elaboration further from Deming on what action China might take. The state run news agency Xinhua also stated that the Chinese government was a "long-term investor" in European sovereign debts," and that it would continue to support Europe and the euro.

Again, though colorful metaphors were used about stormy seas and how the ship that is Europe would "leave no one unscathed" if it capsized, so must be assisted, Xinhua also commented that China wouldn’t "ride to the rescue" of Europe, nor should Europe expect that.

Even despite that mixed metaphor of seas and rescue riders on horseback, China was making itself clear on what it wouldn’t do.

Klaus Regling, who heads the European Financial Stability Facility, or EFSF, visited Beijing in October, and tried to convince the Chinese government that if they invested in the European rescue fund, they would be protected from initial losses and could later sell the bonds in yuan if that was China’s desire. He tried to sell the idea that the EFSF bonds would be a good investment.

Regling was also busy trying to increase the rescue fund at the time, which had $623.7 billion, or €440 billion, to over $1 trillion. Although China said plenty of soothing things through many spokespersons, it didn’t exactly jump at the chance to join in, from all indications.

China’s President Weighs In
Even prior to the G20 meetings in November, China’s government officials, while trying to reassure Europe, made it clear that at most the attitude of the government of the People’s Republic of China was wait and see, not do.

At the end of October, President Hu Jintao said that he was convinced Europe could overcome its economic problems, but didn’t indicate whether China would play a role, if any, in resolving the crisis. China sits on—or more correctly, holds—$3.197 trillion in reserve currency, and although it has current European bond investments, estimates are that China’s non-bond investments in Europe are greater.

On the week prior to the G20 gathering, China’s Hu made no concrete offer for his country to buy more European government debt. Although Hu repeated his assurances of support for and confidence in the ability of Europe to solve its problems, as well as his view that it was essential to international economic stability that Europe solve its crisis, again, no public indication of what China would do other than closely observe the European situation was given.

The notion that some have had that China will somehow ride to the rescue of Europe seems fanciful at best. Despite the soothing, measured words of President Hu and others in China, the Chinese government, while in a much stronger financial position than a fractured Europe right now, knows that wading in with its foreign reserves in a still financially dangerous situation as the eurozone crisis surely is, would be foolhardy.

While the kind, even bland words show a rational, measured opinion of Europe, some in China are more blunt. Jin Liqun, supervising chairman of China’s sovereign wealth fund, had this to say in a candid interview that raised eyebrows:

"If you look at the troubles which happened in European countries, this is purely because of the accumulated troubles of the worn-out welfare society. I think the labor laws are outdated. The labor laws induce sloth, indolence, rather than hard working. The incentive system is totally out of whack."

While the reaction isn’t surprising at all, it’s a bit surprising that anyone that high up in China would be so plain-spoken publicly about it.

But again, as for what China will actually do? No doubt do what it’s doing, bide its time and figure out—just like any other economically powerful country past or present—what’s in its best interests, and go from there.

The direction China’s government goes toward on fiscal and monetary policy will most likely be carried out in small steps rather than a series of large, sweeping moves. As growth and inflation have been moderating now for a few months, the trend is likely to stay in place as China’s export economy will find its trading partners, particularly Europe more than the US, weaker, with slowing demand for products in the foreseeable future.

Observers don’t think that China’s government will shift from what has been it’s tightening mode directly into a full-fledged easing mode by slashing interest rates anytime soon, though. That would have to wait until the target inflation rate is reached, or maybe even with the rate comfortably under the targeted 4% mark.

Premier Wen Jiabao has spoken of "fine tuning" the economy, with a cautious approach which signals no major easing or dramatic policy shifts.

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