China not entirely selfless in shoring up the euro (News Feature)

By Andreas Landwehr Jan 6, 2011, 2:06 GMT

Beijing - China has come galloping to the rescue in the euro crisis. The world's second-largest economic power is shoring up debt-ridden countries such as Spain, Portugal and Greece through purchases of government bonds.

The mere announcement itself went far to calm jittery currency markets and bolster the suffering euro.

But the move is far from selfless. China's Communist leaders want to parlay the euro crisis into political capital. And stabilising the eurozone and a stronger euro are definitely in the interests of China, the world's biggest exporter.

In recent days, Chinese leader Hu Jintao has visited Portugal, Premier Wen Jiabao has been in Greece, and Deputy Premier Li Keqiang this week visited Spain, ostensibly on an errand of mercy, before heading to Germany.

'China is a responsible long-term investor, both in the European financial market and in the Spanish financial market,' Li Keqiang was quoted by El Pais newspaper as saying.

'China has confidence in Spain's financial market. It has purchased Spanish Treasury bonds and will buy still more,' added the man widely seen as becoming China's next premier.

Such gestures are appreciated by euro currency nations which otherwise enjoy little confidence. But it is less a gesture of good will, and rather more a reflection of the simple everyday fact that China needs to invest the euros in its gigantic currency reserves somewhere and somehow.

China has the world's largest foreign currency reserves, totalling 2.6 trillion dollars, owing to is trade surplus.

For some time now it has been the biggest credit source for the United States and is now financing the debts of Europeans.

China is already said to hold some 10 per cent of Spanish government bonds, thus making it Spain's largest foreign credit source.

Dr. Shi Yinhong, professor of international trade relations at China's Renmin University, said, 'The purchase is worthless for China at this moment from the economic point of view. The Spanish financial market is now very bad. What the Chinese government wants is political benefit more than economic profit from not only Spain but also other European countries.'

Speaking to the German Press Agency dpa in Beijing, he added, 'China wants to prove that it has strong will to support all those European countries suffering in financial crisis. And China also wants to show confidence in the euro zone. This is an economic behaviour with political meaning.'

A bankrupt Spain, the fourth-largest economy in the euro zone, would be costly not only for the Europeans. Shock waves from the euro crisis could sharply stunt demand for Chinese exports, Europe being China's biggest trade partner.

In addition, the fall of the euro would impact on the competitiveness of Chinese exports.

Critics accuse China of shoring up European national debts only in order to finance their trade deficits with China. China needs foreign demand for its export products in order to generate growth at home since domestic demand is insufficient to bear China's growth alone.

This does not prevent the Communist leadership in Beijing from expecting reciprocity from Europe. Topping their wish list is the lifting of the arms embargo which was slapped on China in the wake of the bloody crushing of the democracy movement in 1989.

Also, China wants recognition of its status as a market-based economy in order to counter allegations of dumping.

And finally, China would greatly welcome an end to export limits on high-tech goods to China.

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