Don't Expect China to Bail Out the EU

There has been a lot of heated talk – mostly excited, in a breathless sort of way – that China will rescue Europe from its financial crisis with a $100 billion bailout. Policy makers in the West look with envy at China’s 10% economic growth rate and $3 trillion foreign exchange reserves, hoping that the Chinese government will open its checkbook at the on-going G-20 conference in Cannes, France, and bailout European governments, who are floundering in their worst debt crisis since the adoption of the euro. But Europe shouldn’t build its hopes up too high; a Chinese rescue is unlikely.

China will, of course, be very worried about the state of the European economy. Europe represents the largest trading partner that China has, buying up Chinese exports at the rate of 280 billion euros last year. Any further significant downturn in European fortunes would be felt almost immediately in the factories of the Pearl River Delta. It would seem that China has all the incentives it needs to lend a helping hand.

Firstly, the numbers. Even while the Chinese economy posts impressive growth figures, it still only amounts to roughly 10% of the global economy. The developed West, including America and Europe, still make up approximately half of the planet’s total economic output. Stabilizing the euro zone would require a gargantuan effort – as Germany is finding out to its increasing dismay. With all its vaunted clout, China cannot singlehandedly turn Europe around.

Additionally, there is no guarantee that simply bailing out European governments is a surefire way to arrest the crisis. There are currently many competing diagnoses of what caused the crisis – was it governmental profligacy or bad banking, austerity or too much government spending? There is also no general consensus of what path Europe should take. The current practice – German-funded loans – is akin to “kicking the can down the road” and merely delays the inevitable. A European superfund, on the other hand, would be a bureaucratic and political nightmare. Neither course of action would necessarily appeal to the Chinese government. After all, why send good money after bad?

This leaves very few options for a Chinese bailout. Should the Chinese government exercise its financial clout, it would most likely come in the form of direct investment and not just a financial loan. Chinese investment in Europe though has always historically been low – about 1 billion euros last year, accounting for less than 1% of foreign direct investment into Europe.

The most notable Chinese investment in Europe in recent years has been a 2010 Cosco Pacific – a subsidiary of state-owned China Ocean Shipping – deal to take over management of the Athens container port. The $4.2 billion deal infused the Greek government with much-needed cash and arguably sparked Germany’s subsequent response to the Greek crisis.

If China is to bailout Europe, it would be by investing in and acquiring European physical infrastructure – something that European governments would be loath to sell and, given China’s apparent lack of interest in European assets, something China would only exercise if an amazing deal pops up unexpectedly. Investing now in Europe, in the midst of a crisis, even by buying up distressed assets, would be highly risky and something that the financially-savvy Chinese government is unlikely to do without very good reason.

Furthermore, domestic political considerations are likely to stymie Chinese attempts to help Europe’s governments. President Hu Jintao is scheduled to step down next year in the Chinese political tradition of leadership shuffles. He is unlikely to embark on any radical new policy decisions, smoothing the way for expected successor Xi Jinping to take up the reins.

Any attempt to bailout Europe would also most likely be regarded with some suspicion back home. While the popular notion in the West is of a strictly-controlled authoritarian China, Chinese leaders are incredibly sensitive and wary of public opinion. Given the cracks that are starting to appear in the Chinese economic miracle, giving money away to foreigners cannot rank highly among the Chinese citizenry.

Photo Credit: Wikimedia Commons

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