China Research

When I visited China in early May this year, I really got the impression that China was strongly interested in a European recovery as soon as possible. China cares about the EU and EMU – probably mostly for its own sake (which is a normal emphasis and reaction). This includes that China really wants to have a strong economic counterpart to the U.S. in the Western hemisphere – and that it has been investing a lot of money in the Euro since its start.

China’s worries about the economic development of the EU/EMU have been confirmed in recent months statistically, too. Chinese exports have slowed down visibly – particularly what concerns exports to Europe. And the problems that are linked to the crises in mainly Southern Europe have not declined either since spring.

Chinese GDP is now growing slightly below expectations (q2: 7.6 %). This causes concerns since the current president Hu Jintao and prime minister Wen Jiabao certainly do not want to leave the economy to the next generation of political leaders in a worrisome shape. The situation in Europe contributes substantially to the worries.

It is not very common that the Chinese give policy advice to leaders of other countries when they visit China. For this reason, it was quite illuminating that prime minister Wen Jiabao recently explained to the German chancellor Merkel that countries in certain situations cannot solely concentrate on structural fiscal recovery – but also have to rely on traditional Keynesian policy if economic growth is fading too much.

Wen mentioned that China has been very successful in this respect. To some extent, he may be right (at least without regarding the risk of overinvestment). But what China neglects is the point that China has not deregulated cross-border financial flows like the affected EMU countries have – and, consequently, cannot be hit sharply by global speculation. Furthermore, China had – and still has – the advantage of a positive current account balance. This means there is no real need of net borrowing abroad. In other words: Conditions for Chinese expansionary fiscal policy are very different from conditions in Southern Europe (apart from the non-transparent issue of the real size of the Chinese government debt).

Another reason why China is very unhappy about the European debt crisis is of a more financial nature, i.e. the capital losses that derive from the weakening Euro. China wants to diversify its currency reserves from the U.S. dollar to a higher of the Euro. Currently, however, such a strategy is counteracted by the weakening Euro. Despite the ongoing challenges, however, China still invests in the Euro (example: according to the statistics of the EFSF, around 14 % of its funding comes from Asia, Japan excluded, which should be about Euro 5-6 billion of Chinese origin – which on the other hand is not an amount that is really supportive to the Euro).

Altogether: China cares a lot about Europe, the EU and the Euro. But there is not very much China can do or will do to dampen the European crisis more significantly.

Hubert Fromlet
Professor of International Economics
Editorial board

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