The article appeared in the Neue Zürcher Zeitung on 22 September 2011, Nr. 221
Translated by Wallace Ma
Where the US and Europe threaten to drown in the swamp of the debt economy, the prospects are focused on the salvaging shore, where the Chinese are based, with the world’s largest currency reserves. Will they come to the aid of the Europeans? The hope is slight because, unlike the US, the Eurozone has unsolved structural problems.
The world economy is currently in a crisis phase. Nearly all great economic powers in the world agree that cooperation between the countries is more important and necessary at present than ever. Every state should discern and assume its responsibility unflinchingly, urged the chief of the World Bank. The fact is, however, that many states that have already shown problems in realising their responsibility do not seem likely to take action.
The Eurozone is fully occupied with its internal problems. Moreover, some European countries embrace the hope that part of the problems could be solved through assistance from outside. This draws our attention to China and its currency reserves of more than 3 billion dollars. What would it be if China decided to support the Eurozone on a larger scale? This could not only boost the Italian economy, but also to that of the entire EU – However, reality seems different.
China itself is in a dilemma. On the one hand, it wants to safely invest its currency reserves in a diverse form and in different places, so that they will not depreciate drastically at some point (which has already happened partly). Currently, China has invested around 70 percent of its reserves in US government bonds. Another twenty-seven percent of its reserves, with a value of 595.3 billion euro, are held in euro-government bonds (mainly German). On the other hand, China has little room to diversify its investments, due to the decreasing confidence of major markets, such as the US market, the Eurozone or Japan. China can only pray that the global financial system, based on markets in Europe and the USA, will not collapse. In that case, China will also be strongly affected. The confidence that Europe’s finances would recover, such as it is often expressed towards its European partners in China, arises from hope rather than conviction.
It is obvious that the potential withdrawal of certain European countries from the Eurozone or even the complete dissolution of the Euro would have unforeseeable consequences. In this respect, China shares the same view as the Europeans. Meanwhile, Bejing believes that the time is not yet ripe to inject money into the Eurozone. Just like the northern Europeans, the Chinese are sceptical towards the southern European countries, which is why they did not give any promises to the Italians with regard to the acquisition of the government bonds. China would, at most, buy EFSF-loans or Euro-Bonds, as they are tied to the liability of all the European countries. However, at the moment all the discussions are no more than possible future scenarios. Currently, the European countries are still discussing over whether Euro-bonds are a sensible and politically enforceable concept.
In fact, China has already made its calculation: even if the financial situation of the USA is not much better than that the Eurozone, the American problems are still easier to handle. After all, the Europeans are not only confronted with acute financial difficulties, but also with fundamental structural problems. Therefore, authoritative Chinese economists believe that Europe has run into a “Ponzi-game” with an open ending. That means: The USA is still considered the lesser of two evils. No wonder that China recently even raised its share of reserves in US-Dollars.
Essential structural reforms
In Dalian, the Chinese Premier Wen Jiabao had proposed a deal to the Europeans: the EU should recognise China’s status as a market economy and, ideally, even lift the embargo on weapons. In return, China could financially support the Eurozone. Even if the EU accepted the deal, the effect of the Chinese investments would be limited, as it could not improve structural problems of the Eurozone, which is seen as a prerequisite for committed foreign investments. Without structural reforms, China, like the other BRIC-countries, will not be willing to invest its reserves. For these reasons, China will further rely on US dollars and provide the EU with, at most, only concessions to a limited extent. This cannot be changed even after the upcoming China-EU summits.
Realistically, China will contribute to the improvement of the situation of the Eurozone in such a way that it is investing increasingly in form of foreign direct investment into the private sector, even though such a contribution sometimes does not lead to direct and immediate effects. Europe is still an attractive place for China for investments in property assets. Hence, the Europeans must solve the problems of the Eurozone “by themselves”, like the Chinese government leader said recently, “no hopes should be on China”.
With the current critical situation, a new round has de facto begun between the two worlds. One of them is a liberal and social, capitalistic world. The other world is represented through the Chinese nomenclatural capitalism, which may be connected to the Western, capitalistic world in many ways, but is entirely following its own rationale.
In less than ten years, it will become apparent of which of the two systems will prevailing this race. My guess will be that time is running in favour of China – and to the disadvantage of liberal or social capitalism. By then, the Chinese currency will be on the same level as the Euro, the US dollar and the Japanese Yen. China’s share in global GDP will become even larger than today.