International ties

New year, old EU woes for China

By Huang Shuo (chinadaily.com.cn)
Updated: 2011-01-07 17:59

As we enter 2011, some of China’s previous year’s worries like EU sovereign debts have continued into the New Year.

Chinese officials in charge of business and trade have expressed their worries about the Euro zone debt crisis, and voiced supports for the European Union (EU)’s measures and great efforts to stabilize the euro in the global market. The debt crisis is somehow an extension to the international financial crisis in 2008, some economic analysts think that China merely plays a limited role in helping those troubled EU member states out of turbulence. In fact, China is very concerned about the crisis which may have global impacts on major economies.

The foreign exchange (forex) reserves of China broke the threshold of 2.6 trillion US dollars, amid which, the euro may account for one quarter or so of the total forex reserves while the US dollar still takes up two-thirds, according to estimates by some investment institutions and experts.

In these years, with the downturn of the US economy, there is a new choice for China instead of the traditional currency for forex reserves – the euro which is considered by many policy-makers and experts from major economies including BRIC countries Brazil, Russia, India and China to be the priority.

With the increasing seriousness of the euro crisis, little effects by EU authorities have been seen. China carefully holds a go-and-look attitude and observes the changing situation because of the country’s uncertainty toward whether the debt crisis in the Euro zone is likely to continue diffusing and if the debts can be restructured or not.

The EU and International Monetary Fund (IMF) provided emergency assistance to Greece and Ireland, the two countries respectively confronting to sovereign debt infringement early in 2010. EU policymakers notably started a consideration to adjust 440 billion euros of aid fund including using the fund to purchase distressed treasury bonds (T-bonds).

On Dec 16, 2010, the European Central Bank (ECB) announced that its capital scale will be expanded from 5.8 billion euro to 10.5 billion euro, which is understood as a bigger buffering for the ECB in order to keep buying the distressed T-bonds of Greece, Ireland, Portugal and other trapped nations inside the EU.

On the other hand, although China worries about the spread of the crisis, the country’s stance on the current crisis boosts confidence of overcoming the difficulty facing Europe. Also on the Third China-EU High Level Economic and Trade Dialogue this year, China supported the EU and IMF’s stabilized measures in finance, and would assist some countries with sovereign debt crisis with actual deeds, said Wang Qishan, vice-premier of China.

Moreover, visiting Vice-Premier Li Keqiang vowed to help Europe solve its debt crisis as he started his three-nation European tour at the beginning of 2011. Li also expressed that China will buy more of the country's treasury bonds "depending on market conditions" during his visit in Spain.

So far, the ECB has merely purchased bonds valued around 70 billion euro at the secondary market. The scale of the European Financial Stability Fund still has its own limitations. On that context, many EU countries only pin their hope on China, the world’s largest developing country with huge market and economic potential, to takeover euro bonds on a large scale to settle the burning issue, which is unpractical and reluctant. Whereas, China also has different burdens such as high commodity prices needed to be solved urgently in the domestic market.

To deal with the impact and consequence of the debt crisis in Europe, China should proactively settle its harm. First, the fiscal deficit of government cannot be arranged at a high level, because the scale of deficits in the last two years is lingering near the warning line of 3 percent. Second, Chinese government should not issue too many treasury bonds in order to reduce repayment risk.

As a responsible rising star, China should also support and offer the aid within its means so as to stabilize the euro currency and economy in the Euro zone together with counterparts, which is beneficial not only for the global economy, but for its fast-growing economy’s healthy development.

The author can be reached at larryhuangshuo@gmail.com.