Europe Seeks Chinese Support

NYT: China Considers Offering Aid in Europe’s Debt Crisis
Spiegel: Merkel Seeks Euro Zone Investments from Beijing
WSJ: Wen Rejects Fears China Is Out to 'Buy' Europe

Last week, during her visit to China, German Chancellor Angela Merkel sought to persuade the Chinese government to increase its investment in Europe. China has approximately $3.18 trillion in foreign exchange reserves, putting the country in a strong financial position to make significant contributions to help alleviate the European debt crisis. European leaders want China to purchase bonds from economically weaker countries in the Eurozone. An increase in Chinese bond purchases could help restore investors’ confidence in Europe as it would signal that a financial powerhouse (China) believes that European leaders are on the right path to overcoming the crisis. China already has been acquiring bonds from the economically stronger European countries.

Chinese officials are currently examining whether the country should increase its participation in Europe by investing in the region’s two rescue funds—the existing European Financial Stability Facility and the newly created European Stability Mechanism. In addition, Prime Minister Wen Jiabao also stated that China is considering working with the International Monetary Fund (IMF) to channel contributions to Europe. In other words, China would lend funds to the IMF, which in turn would relend the money to European countries in need. This lending scheme would effectively transfer a significant portion of the risk of any European debt default to the IMF—allowing China to shield itself from the risk of lending to unstable European economies. It would not be the first time countries have used such a lending approach to aid Europe. In December 2011, Russia lent the IMF $20 billion to assist Europe, while Britain is also currently considering sending more money to the organization to help with the region’s troubles. Lending through the IMF is attractive to these countries because of the conditionality and oversight powers of the institution. An IMF loan is provided under an “arrangement” which specifies conditions and measures that the country must implement to receive the entire loan. The country receives the loan in installments and the IMF oversees the implementation of the conditions before each installment is disbursed. Thus, the IMF ensures that European countries are implementing the necessary measures to combat the crisis.

It is in China’s best interest to help Europe overcome the debt crisis. Europe is China’s largest export market and China imports the vast majority of its technology from Europe. However, due to the European crisis, Chinese exports have decreased. As instability in Europe worsens, the demand for Chinese goods will continue to decrease with consumers further cutting down on spending. Lower demand will in turn negatively affect the Chinese economy—which relies heavily on exports to Europe. Thus, by aiding Europe in its debt crisis, China is also helping its own economy by maintaining a stable import and export sector.