China’s Premier Wen Jiabao said on September 14, 2011, at the World Economic Forum in Dalian, China, that the Chinese government remains able to purchase European debt, but advises the European governments to drastically cut deficits, liberalize markets, and implement a multitude of financial measures to alleviate the crisis and reestablish credibility and trust in the euro.
Mr. Wen’s advice to the European governments was necessary and even needed. For more than a year the European Union (EU) has experienced a grave debt crisis, which its leaders appear unwilling to solve. Mr. Wen’s concerns that the European markets revitalize suggest that even China, the world’s most rapidly developing economy and increasingly the leader in global economic growth, is unable to avoid the crisis that began in Greece in 2010.
The Euro Zone’s economic crisis is partly caused by Greece’s massive debt and rising deficits. Mr. Wen’s words of advice to the European governments on how to become economically stable are correct. According to many Western economists and The Economist, austerity and massive cuts are the key to solving the crisis. These radical measures would include privatizing companies, delaying retirement, liberalizing professions and services, and reducing the bloated bureaucracy.
Europe’s unwillingness to quickly resolve its problems is beginning to affect the Chinese economy. The European Union is China’s largest export market. The EU’s current economic crisis is negatively impacting China’s export trade, the reminbi (rmb), and Chinese ability to import goods. China’s exports to a few EU countries have dropped in the last few months. In March and April, imports from China into Spain fell drastically, and in May imports from China to Portugal fell by 11.6%.
The EU’s economic crisis is affecting Chinese business not only with the severely economically devastated EU nations, but also with wealthier and more stable EU countries. Imports by Denmark, France, and the Netherlands have dropped sharply. Even more importantly is that imports by Germany, the Euro Zone’s main economic engine, have also severely decreased.
Nor is the rmb safe from Europe’s economic problems. China’s state administration of foreign exchange pointed out that the rmb’s incremental appreciation will be affected by the European debt crisis. The weaker euro is forcing the Chinese rmb to strengthen, which is reducing Chinese profits in almost all industries.
Young people on Weibo, China’s version of Twitter, which has over 70 million members, have expressed their resentment towards Mr.Wen’s willingness to help bail out the Euro Zone. One user posted “The Chinese government should use their reserves to build schools and healthcare in China, let the Europeans take care of themselves.”
The question becomes, should China be purchasing European debt knowing that Greece and other European nations could be insolvent. Mr. Barry J. Naughton, a professor of Chinese economy who teaches at the University of California, said that the Chinese are purposely being vague about their intentions until they can find more lucrative opportunities in Europe.
“The real question is whether it should buy more now for political reasons (or because it thinks it will end up a good deal). It seems to me that the best policy from China’s standpoint is to express vague willingness and support but not really do anything major until there are further opportunities or proposals from the Europeans”, said Professor Naughton in an email to World News Report.
Li Daokui, a member of the monetary policy committee of China’s central bank, said at the World Economic Forum in Dalian, China, on September 14, 2011,“I don’t think any country can be saved by China in today’s world. Countries can only save themselves by pushing through reforms.”
But Mr. Wen did not just offer the Europeans a golden nugget. During his speech in Dalian, Mr. Wen made an unprecedented move for China. He offered to help the Europeans under the condition that they renounce the last obstacle against cheap Chinese products.
Mr. Wen encouraged the EU to change China’s current classification from a “nonmarket economy” to a “market economy.”
This means that the European Union will not be able to impose tariffs on Chinese goods. By keeping China classified as a nonmarket economy, The EU can compare Chinese products’ prices with other low-cost countries. In other words, if China’s products prices appear too low, which could be caused by a variety of reasons, the EU can impose tariffs.
Regardless of whether or not the European Union decides to reclassify China’s market status, the fact is that Europe’s current situation desperately needs international loans. One of the best contenders for this deal right now is China because to the access to resources and willingness to offer assistance.
China giving Europe a helping hand will not only help stabilize Europe’s economic crisis, but it will also give China more influence in the region and the world. Carol H. Shiue, a professor of economics at the University of Colorado at Boulder agrees.
“Even though there is a risk of default, by buying up European debt and becoming Europe's creditor, China can trade some of its considerable foreign earnings for political influence in Europe. Imagine China imposing financial conditions on Europe--that certainly expands China's global importance to an entirely new level” said Professor Shiue.