All eyes on Europe

“China has no appetite or ability to buy up Europe or control Europe as some European commentators have said,” wrote Feng Zhongping, director of the Institute of European Studies at the China Institute of Contemporary International Relations. “China has from the beginning strongly supported the EU and the euro, in clear contrast to the talking down of Europe in the international community,” Feng wrote in the piece, carried in the papers overseas edition. China has promised not to link helping Europe in the debt crisis with issues such as the EU recognizing China as a market economy or the EUs arms embargo on China, Feng added. “This is the best example of Chinas proactive stance on the EU,” he wrote. Any Chinese economic assistance to resolve the debt problem, whether via the International Monetary Fund or the EUs own systems, would be a purely economic decision, Feng said.

via China paper says country does not want to buy up Europe | Reuters.

 

China increasingly has to worry about flagging demand in critical export markets like the United States and the Eurozone, especially as their fiscal expansion has mostly expired. The latter problem is currently working itself out via the PRC encouraging banks to rollover the debts of local or provincial governments, which should at least reduce the size of the domestic contraction. The former, however, is more troubling.

Interconnectivity has been the driving force of Chinese growth for much of the last two decades, and it has paid off handsomely for them. Now, that return is much less certain. Consumer credit in the US has been surprisingly easy to divest, and Americans have remained reluctant to make the plunge again in uncertain times. European consumer spending is also trending downward, placing the Chinese in an awkward position in terms of sourcing future growth. Developing markets are, well, not quite developed enough to prove reliable customers for Chinese goods, and China’s two main trading blocs are proving unreliable.

So while Feng indicates China has no “appetite” for European domination, the “ability” question might be more relevant. Put simply, China can borrow again to finance European solvency, thereby (hopefully) stimulating demand for Chinese goods, or they can take an immediate hit in terms of reduced domestic growth – a particularly frightening prospect for the CCP, which fears widespread social upheaval if unemployment rises too much. The former strategy just kicks the can down the road, however, as current rollovers are demonstrating: at some point, that debt will come due, and who knows what fiscal condition China will be in then?

The choice between alarming demographic pressures now or aggressive bond vigilantes later is not a facile one. The most likely outcome is that the PRC decides the risks of financial market failure are globally dispersed, while social failure is far more concentrated. Moral hazard, indeed.

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One thought on “All eyes on Europe

  1. Nice post, Alex. Specifically, I am looking for a three things when I read a blog. 1) I want the story to be about something related to Asia (the above post does that), 2) I am looking for one of the seven themes and how the theme relates to the story (the above post does this very well), and finally, I am looking for the post to be in your own voice (the above post does this very well). I enjoy reading your work and having you in class (when you are able to attend). 🙂

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