China has maintained increasingly close relationship with Europe in trade, investment among other fields. Therefore, when the European debt crisis took place, it immediately became a hot issue of great interest for Chinese policy-makers, scholars, the media and the public. In this paper, I intend to present what the Chinese scholars say about the causes of the crisis. Then, I shall analyze the impact of the crisis on China. Since people around the world have been discussing whether China should “save” Europe or not, I want to summarize the major arguments about this question. I will also attempt to offer a brief introduction about China’s official position towards the crisis. Finally, I shall try to discuss the possible ways for China to help Europe overcome the crisis.

I. What Are the Causes of the Crisis?

The European debt crisis immediately attracted the attention of the Chinese scholars soon after it broke out in late 2009. Many of them have endeavored from different angles to dig out the root causes leading to the crisis. Needless to say, their conclusions are diversified.

According to Qiu Yuanlun from the Chinese Academy of Social Sciences, the crisis is the result of both external and internal factors. Externally, Europe failed to adapt itself to the rapidly changing landscape of the world economy by strengthening its competitiveness. Internally, Europe had been suffering from long-term slow economic growth, but still attempted to maintain the functioning of the welfare system, causing an increasingly heavy burden for the public finance.[①]

Chen Jiemin and Zhang Yao from the School of Economics at the People’s University of China believe that the causes of the crisis are closely related to sluggish economic growth of the EU, over indebtedness, “trilemma” or the “impossible trinity” of the Euro, and short of fiscal union within the Eurozone.[②]

Jiang Yanxia from the Graduate School of the People’s Bank of China argues that the European debt crisis was the result of the Eurozone’s institutional shortcomings such as

1) the disparity between a unified monetary policy and separate fiscal policies; 2) inability to cope with asymmetric shocks; and 3) inefficient decision-making mechanism.[③]

According to Chen Xin from the Chinese Academy of Social Sciences, the European debt crisis reflects the unsustainability of Eurozone’s public finance as well as the shortcomings in its economic governance.[④]      

Some Chinese scholars have perceived the crisis in a broad aspect. For instance, Zhu Bangning and Yang Juncheng from the Central Party School believed that the Greek debt crisis was caused by 1) over-indebtedness which was the result of organizing the Olympic Games in 2004 and fiscal stimulus for the purpose of overcoming the repercussions from the 2008 international financial crisis; 2) “cooking the books” with the help of Goldman Sachs; 3) an economic structure easily under attacks of external shocks; 4) a social welfare system incompatible with government revenues; 5) inherent shortcomings of the Euro system; and 6) the rating agencies’ repeated down-grading of its sovereignty.[⑤]

While most of the Chinese scholars look at the crisis in economic dimensions, a few of them try to analyze it in political or ideological perspectives. For instance, Chen Shuoying from the Chinese Academy of Social Sciences believes that the Greek debt crisis is the inevitable result of the inherent contradictions of the capitalist system. It was also caused by the greedy nature of financial capitalism, implying that Goldman Sachs helped the Greek government to mask the true extent of its deficit with the help of a derivatives deal. According to the author, the Greek debt crisis clearly exhibits the characteristics of “pseudo-democracy” found in the representative democracy of capitalist system because the decision to join the Eurozone was passed by the parliament, not the result of a referendum. In order to minimize the impact of the European debt crisis on China, the author says, it is imperative to stick to socialism with Chinese characteristics, slow down the pace of diminishing public ownership, limit the extent of enlarging private ownership, narrow the income gap, and stimulate domestic demand.[⑥]

II. What Is the Impact of the Crisis on China?

Theoretically speaking, any economic crisis affects other nations through two channels, i.e., trade and financial flow. Indeed, crisis tends to weaken the nation’s demand for imports and reduce its capacity to invest overseas.

Europe is China’s largest trade partner. Therefore, Europe’s economic situation can exert direct and immediate effect on China. It is true that trade relations between China and Greece, Ireland and Portugal are limited. As Table 1 shows, China’s exports to these three problem countries totaled less than US$9 billion in 2011, or 2.5% of its total exports. However, the crisis has greatly damped demand of the whole EU. Moreover, the crisis has also jeopardized world economic growth, creating an unfavorable environment for Chinese exports.

Exchange rate plays an important role in foreign trade. The European debt crisis has depreciated the Euro, while RMB, the Chinese currency, has to be appreciated (see Figure 1). On May 23, 2012, RMB to Euro exchange rate fell below 8.00, reaching a record low.[⑦]

Economic crisis tends to encourage higher trade barriers. According to Pascal Lamy, World Trade Organization’s (WTO) Director-General, the European debt crisis, which sparked a globalised crisis, may lead to countries resorting to protectionism.[⑧] The Chinese media has reported that since the European debt crisis broke out, the EU has stepped up its protection by launching more anti-dumping investigation against China.

It is true that bilateral trade is affected by many factors, but it is certain that the weakened demand from the EU, RMB’s appreciation and protectionism, among others, have contributed to the sluggish growth of Chinese exports to the EU. As Table 2 indicates, growth rates of Chinese exports to both the EU as a whole and some individual countries in 2011 were lower than those of 2010. In the first quarter of 2012, the comparative figures all witnessed decrease. The largest negative growth rate was with Greece (30.7%), followed by Italy (29.4%), Portugal (22.8%), Belgium (12.6%), Germany (2.9%), France (0.1%) and Ireland (0.1%).

During crisis, investors tend to be cautious in moving their capital around the world. Furthermore, their investment behaviors are negatively influenced by the European banks which have also been affected by the debt crisis. But investment flows are determined by many factors, and the debt crisis is only one of them. That is why the figures about the EU’s investment in China fail to present a totally negative image. For instance, according to China’s Ministry of Commerce, the EU invested US$63.48 in 2011, 3.65% less than the previous year; but in the first six months of 2012, China attracted US$3.5 billion from the EU, 1.56% higher than the same period in 2011 (see Table 3).

Of course, it is logical to argue that, without the European debt crisis, the EU might have invested more in China. In other words, without the crisis, the figure for 2011 should have been positive and the growth rate of 2012 much higher.

Regrettably, the European debt crisis is sometimes blamed for everything negative. For instance, a Taiwanese businessman in Shanghai, who has a spectacular taste for wine and has collected many high quality of the product, said that the reason why the price of the famous French wine produced by Château Lafite Rothschild went down dramatically recently was the European debt crisis. According to him, banks went bankrupt first and Lafite could not escape its doomed fate.[⑨] An article on a Chinese web also points out that the European debt crisis was one of the scapegoats for the declining prices of high-quality wine around the world in 2011.[⑩]

Some even say that the European debt crisis has also affected China’s stock market in a certain way. For instance, the Xinhua News Agency reported that, due to risk aversion associated with global capital movement caused by the European debt crisis, China’s stock market was very sluggish in the second quarter of 2012.[11] But the report did not elaborate how and to what extent the stock market was negatively affected by the crisis.

III. Can China “Save” Europe?

Regarding the issue whether China can “save” Europe or not, there are four major points of views among the Chinese.

1. China should “save” Europe. This necessity is based on the following three reasons:

First, China has established the so-called Overall Comprehensive Strategic Partnership with the EU. In the Chinese cultural tradition, helping others to get out of trouble contributes to the accumulation of a person’s good virtues. A friend in need is a friend indeed.

Second, China can raise its international position on the world stage as well as strengthen its soft power by offering a helping hand to Europe. China should not miss this chance to tell the world that the Asian giant is different from what it was three decades ago.

Third, China can diversify the use of its more than US$ 3 trillion foreign reserves by purchasing European bonds. So far, China only invests in American debt and it is not wise to put all the eggs in one basket. In a sense, the European debt crisis has created a golden opportunity for China to expand reserve diversification.

2. China should not “save” Europe. Some Chinese netizens are not ready to accept the idea that China can “save” Europe. They point out the fact that China is still a developing country with more than 100 million people living below the poverty line, though its GDP has become the second largest in the world.[12] Particularly, China’s GDP per capita is only US$4000, compared with US$20 000 in the EU member countries. Many poor Chinese patients cannot afford to visit hospital whereas Europeans enjoy excellent cradle-to-grave welfare.[13] China needs to sell 800 million T-shirts to earn enough hard currency to exchange for one Air Bus A380.

Not only netizens but also some economists are not in favor of the idea that China can “save” Europe. Han Zhiguo, an economist, even describes China’s wish to “save” Europe as “a sheep saving the life of a wolf”.[14]

It is interesting to note that, just when many Chinese people were debating whether China should “save” Europe or not, Wenzhou, a coastal city in China’s Zhejiang Province, was in the limelight as many private enterprises there were having great difficulties meeting their huge debt obligations. Therefore, some netizens expressed their mind by saying that the Chinese government should save Wenzhou, not Ouzhou (Europe).

3. China should not be a counter-productive helper. Some Chinese economists believe that what Europe needs urgently is not money, but reforms. Therefore, should outsiders like China offer a helping hand to Europe, things would have been made worse. Some people even say that Germany and France have their own plans to pressure Greece and other countries in crisis to push forward reforms. If China jumps in to help Greece and others, the strategy designed by Germany and France might be jeopardized.

4. China blackmails Europe. Addressing the Summer Davos of the World Economic Forum on September 14, 2011, in Dalian, China, Chinese Premier Wen Jiabao said China would continue to assist the EU to overcome the current debt crisis. He also mentioned that, during his telephone conversation with President José Manuel Barroso, he expressed his wish that the EU should look at China in a strategic perspective by granting China the market economy status (MES). Despite the fact that MES will automatically come to China’s door-step in 2016, an earlier grant would be understood by China as a token of friendship and sincerity from the EU.

But Premier Wen Jiabao’s words were misunderstood by some people in the West. His frank expression was interpreted as “a friendly blackmail of the EU” by China. For instance, John Foley, a Reuters breakingviews columnist, believes that “China’s friendly blackmail of EU may do the trick”. “It's no surprise that China's pledges of support for indebted trade partners come with strings. But Premier Wen Jiabao…was unusually blunt about what he expects in return: to be named by Europe as a market economy. That would cost Europe little -- but that doesn't mean it should agree,” writes Foley.[15]   

IV. What Is China’s Official Position towards the Crisis?

China’s official position towards the European debt crisis is consistent and straightforward. On August 25, 2011, Chinese President Hu Jintao told visiting French President Sarkozy in Beijing that China is keeping a close watch on the situation and expects financial reforms by some European countries to be successful. He said, “China is confident about the European economy and the Euro. We believe Europe has the wisdom and capability to overcome its current difficulties and maintain economic stability and growth.”

In his written interview with the French newspaper Le Figaro on November 2, 2011, President Hu Jintao said that China is confident that Europe has the determination, ability and resources to solve the debt crisis. “The recently held EU summit produced some new measures and ideas, which demonstrated the will of Europe to work closely together for a solution. We hope these measures will help Europe stabilize its financial markets, overcome current difficulties and promote economic recovery and development. China sincerely hopes to see stability of the Eurozone economy and the Euro itself,” wrote the Chinese leader.[16]

On February 15, 2012, during a meeting with President Herman Van Rompuy and President José Manuel Barroso, who were in China for the 14th China-EU summit, President Hu Jintao said that China closely follows the developments of the European debt crisis and supports the measures the troika has taken to cope with the crisis. The European delegation said it appreciates China’s support for its integration, as well as China’s efforts to help the EU to deal with the crisis.[17]

At the BRICS summit in India in March 2012, President Hu Jintao said that, it is highly necessary for the EU, the world’s largest economy, to realize rapid economic recovery. According to him, the EU needs to rely on itself to resolve the debt crisis. He also said, “We are confident that the EU has the wisdom and ability to cope with the crisis. At the same time, the international community will provide with assistance and help.”[18]

Speaking on the phone with President Herman Van Rompuy and President José Manuel Barroso on October 21, 2011, Chinese Premier Wen Jiabao highlighted the significance of international cooperation in the global financial and debt crisis, saying that China supports EU’s efforts to cope with the crisis and stands ready to beef up coordination and cooperation with the EU to contribute to a global economic recovery.[19] He also said that the European debt crisis is not just closely related to the unstable recovery of the global economy against the backdrop of the international financial crisis, but also is a result of long-term accumulation of internal problems within the EU and the Eurozone.[20]

When German Chancellor Angela Merkel was in Beijing in early February 2012, Premier Wen Jiabao told her that China is undertaking feasibility studies regarding such issues as whether and how it can help Europe. He said that it is “very urgent and important” to solve the European debt crisis, and that China attaches great importance to the issue from a strategic perspective as the global economic situation remains grim. According to the Chinese leader, since the EU is the world’s largest economy and China’s largest trading partner, the bloc’s financial stability, economic growth and integration not only affect Europe’s fate and future, but also that of China and the world. “China is considering deeper involvement in the efforts to address Europe's debt crisis, possibly through channels like the European Financial Stability Facility and the European Stability Mechanism,” said Premier Wen Jiabao at a joint media briefing after talks with Chancellor Merkel.[21]

Less than two weeks later, at the 14th China-EU summit in Beijing, Premier Wen Jiabao told President Herman Van Rompuy and President José Manuel Barroso that China’s support for the EU to resolve the debt crisis is sincere and determined. He said that China is ready to step up its efforts to help the EU with more strength. At the same time, China also supports the EU’s endeavor to strength fiscal discipline.[22] In a joint news conference with European leaders on February 14, 2012, Premier Wen Jiabao once again proclaimed that China was willing to increase its involvement in attempts to stabilize the Eurozone. “China is firm in supporting the EU side in dealing with the debt problems. We match our words with our actions,” he said.[23]

When Premier Wen Jiabao was inspecting Guangdong Province in early February 2012, he told the local business people that China needs to look at China’s relations with Europe at a strategic height. He said that Europe is China’s largest market and also a major source of advanced technology for China. As a result, if China can help Europe stabilize the situation, it is tantamount to helping China. “People must understand this point: help for Europe is the same as help for ourselves,” said Premier Wen Jiabao.[24]

At a press conference of the National People’s Congress on March 7, 2012, Chen Demin, China’s Minister of Commerce, promised to import more from Europe. He said that recently there had been an increase of European exports to China as well as a rapid expansion of Chinese investment, both green-field and M&A, in Europe. “This is clearly the moral standing and generosity of the Chinese people, who can be counted on,” said the high-ranking Chinese government official.[25]

V. How Can China Help Europe?

As a matter of fact, the Chinese word “救” (“jiu” or save) has two different meanings. On the one hand, it means that a helper pulls the victim out of trouble completely; on the other, it also indicates that a helper only extends his assistance so that the situation of the victim will not become worse. Apparently, many people in China only look at the first meaning of the character “jiu”. In other words, China alone cannot pull Europe out of the crisis completely, but only offers a helping hand.

There are five ways for China to help, not “save”, Europe from sinking deeper into the debt crisis.

1. China can import more from Europe, allowing it to create more employment opportunities as well as gain more financial resources to revive its economy. Chinese leaders have repeatedly made promises to open China’s market wider for European products and technology. During his visit to Spain, for instance, Wu Bangguo, Chairman of the Standing Committee of China’s National People’s Congress, said that China is willing to buy more Spanish products such as wine and olive oil.[26]

According to China’s Ministry of Commerce, China’s imports from the EU increased from US$127 billion in 2009 to US$211 billion in 2011 (see Table 1). In the first quarter of 2012, as compared with the same period in 2011, China’s exports to the EU declined by 1.8% whereas imports from the EU increased by 12.4%. It would be more striking if the China-EU trade statistics are compared with the growth rates of China’s total trade with the world in the same period: 7.6% for exports and 6.8% for imports.[27] If exports mean jobs, it can be concluded that China has contributed positively to Europe’s efforts to cope with the crisis.

2. China can purchase European bonds. Needless to say, there are also divergent opinions regarding the issue. Some economists believe that it would be a win-win scenario if China buys a certain amount of national bonds or the EU’s bail-out funds, the European Financial Stabilization Facility (EFSF), because this action can diversify the structure of China’s own foreign reserves by increasing the share of Euro and reducing that of the US dollar in the assets.[28] However, there are also other economists who discourage the government to do so. According to them, it is simply too dangerous for China to invest in the European bonds.[29]

China’s official position on this issue is positive. Premier Wen Jiabao said that China would continue to invest in Euro debt, a plan that falls in line with the principles of security, liquidity and value preservation. He said the second-largest economy in the world will use the IMF, the EFSF and the future European Stability Mechanism as the means of offering aid in the debt crises.[30]

At the end of October 2011, Klaus Regling, EFSF’s Chief Executive, visited Beijing to persuade China to make investments in it.[31] According to The Wall Street Journal, Regling dismissed suggestions that European leaders would be forced to offer concessions to China in return for investment. “I am not here to discuss concessions,” he said, noting that China had already bought EFSF bonds and got no special considerations.[32] The Financial Times reported that Regling noted that China had been “a good, loyal” buyer of EFSF bonds over the past year and said that he expected that it would continue to view the Eurozone bail-out fund as a good investment.[33]

Foreign media coverage about China’s purchase is by no means few. An article published in The Guardian on January 12, 2011, reported that China had already controlled 13% of Spanish sovereign debt. It also said, “China indicated that it planned to buy Spanish bonds at a crucial auction tomorrow, after purchasing Portuguese debt today, bringing much-needed investors’ confidence to the two troubled countries.” According to The Guardian, Yi Gang, Deputy Governor of the People’s Bank of China, China’s central bank, told the British newspaper in an interview that China took a positive role in Europe’s “delicate times”. “We have been and are a consistent buyer and we have a long-term view of our investments in Europe,” said Yi Gang.[34]

However, it is almost impossible to acquire the authentic statistics about the amount of Chinese purchase of European debt. According to The Financial Times, at a press conference in London during Chinese Vice Premier Li Keqiang’s European tour in early 2011, Yi Gang declined to reply to the question three times: “Can you confirm that China agrees to buy €6 billion Spanish debt”. Fu Ying, China’s Vice Minister of Foreign Affairs, who was chairing the meeting, said, “No matter how you ask, Yi Gang will not tell you the exact number (of the amount of China’s purchase of Spanish bonds). Otherwise, it will greatly affect the financial market.”[35]

But China Radio International reported on May 24, 2012, that, if 20%~25% of China’s foreign reserves have been used for investment in Euro bonds, then, by the end of March 2012, the total amount would as much as €660 billion.[36] China Daily also reported on March 13, 2012, that about 20% of China’s foreign reserves had been invested in Euro-denominated assets.[37]

3. China can contribute more funds to the IMF so that the international organization can have more financial power to help Europe. China has long been interested in making more contributions to the IMF. At a press conference after the closing meeting of the Second Session of the 11th National People’s Congress, Premier Wen Jiabao put forward four principles on this issue: 1) The internal governance structure of the IMF needs to be reformed so as to better fend off financing and investment risks, balance rights and obligations of the member countries, and pay more attention to the interests of developing countries. 2) Member countries should shoulder responsibilities jointly in accordance with their quotas. 3) Other international financial institutions should be encouraged to resort to various ways of financing. 4) Any member’s increase of its contribution to the IMF should be considered in the light of its own national realities and be based on its voluntariness.[38]

On December 15, 2010, the IMF’s Board of Governors approved a package of far-reaching reforms of its quotas and governance, completing the 14th General Review of Quotas. Once the reform package is approved by member countries and implemented, it will result in an unprecedented 100% increase in total quotas and a major realignment of quota shares to better reflect the changing relative weights of the IMF’s member countries in the global economy.[39]

China hopes the IMF would urge its members to complete the review of the membership quota reform plan approved in 2010 as soon as possible. A statement posted by the People’s Bank of China on its web in April 2012 said, “Regarding increasing resources for the IMF on the basis of a consensus in the international community, China will not be absent from the effort.”[40]

At the spring meeting of the IMF and the World Bank in April 2012, some members of the IMF agreed to increase IMF resources by over $430 billion, almost doubling its lending capacity.[41] In her statement released on April 20, 2012, Christine Lagarde, Managing Director of the IMF, said, “This signals the strong resolve of the international community to secure global financial stability and put the world economic recovery on a sounder footing. These resources are being made available for crisis prevention and resolution and to meet the potential financing needs of all IMF members.” She was grateful to China, Russia, Brazil, India, Indonesia, Malaysia, Thailand and other countries indicating that they will be among the contributors.[42]

Two major factors might explain why China wishes to help the EU through the IMF. First, by making more contributions to the IMF, China’s position in it can be raised. As the world’s second-largest economy, China’s quota in it ranks only sixth, far behind the US, Japan and Germany (see table 4). Second, safety can be guaranteed if China’s financial resources are mobilized for help on a multilateral platform.

4. China can make more investment in Europe so as to help generate more jobs at a time when austerity measures have incurred great social costs. The debt crisis has dealt a heavy blow to many European enterprises. At the same time, faced with fiscal austerity, some governments in Europe have to privatize the public enterprises. In Greece, for instance, the government has decided to carry out a weighty privatization program in which casinos, railways, real estate, betting, water companies, marinas, airports and other infrastructures will be sold for €3 billion over a three-year period.[43] Portugal was going to privatize its bank and insurance, airline, rail transport, postal, energy and paper industries to raise about €6 billion by 2013.[44]

Since the end of the 1990s, China has been implementing the so-called “going-out strategy”, encouraging Chinese investors to make overseas investments all over the world. Europe has political stability, a huge market, well-established infrastructures, etc. So it is an attractive investment destination for China and other emerging economies.

Economics textbook and the reality tell us that investment is a win-win outcome for both home and host nations. Chinese investment in Europe can create jobs, make tax contributions and promote local development. But some people in Europe fail to recognize this fact. As the Economist writes, “Chinese investments make Europeans nervous that China intends to use its amassed surpluses to buy European jewels at knock-down prices.”[45] According to a report published in July 2011 by the European Council on Foreign Relations, a think-tank quite well-known for its long-standing criticism against China, a kind of “scramble for Europe” is now taking place as China purchases European government debt, invests in European companies and exploits Europe’s open market for public procurement. “Crisis-hit Europe’s need for short-term cash is allowing China not just to strike cut-price deals but also to play off member states against each other and against their own collective interests,” the report says.[46]

No wonder the mentality of “fear of China” has caused uproar when Chinese investor Huang Nubo intends to invest $100 million in Iceland to build a tourist resort. The project is accused of an official background as he used to work in the Publicity Department of the Central Committee of the Communist Party of China and the Ministry of Construction. Worse, the investment is perceived to provide cover for China’s geopolitical interests in the Atlantic island nation, which is also a member of NATO.

5. China can continue to hold its Euro-denominated assets. No matter what is the exact amount of Euro-denominated assets China has acquired, the fact is that the long-lasting European debt crisis has shrunk the value of these assets. China can dump them at any time. Undoubtedly, this action will further weaken market confidence, thus jeopardizing the EU’s endeavor to quell the crisis.

At a press conference of the National People’s Congress on March 13, 2012, Yi Gang said, “We believe that Europe will ultimately overcome the debt crisis through their own efforts as well as with help from the international community…and China will continue to be a long-term and responsible investor in Europe.” He also revealed that there are three major factors affecting government’s thinking when it tries to diversify the foreign reserves portfolio: safety, liquidity and potential revenues.[47] Zhou Xiaochuan, Governor of the People’s Bank of China, was also reported to say that “China will always adhere to the principle of holding assets of EU sovereign debt.” [48]

VI. Concluding Remarks

The European debt crisis is detrimental to China as its economy has been closely integrated with the world. China cannot “save” Europe, but can offer a helping hand in several ways. Moreover, China never intends to “blackmail” Europe in any way. Its help for Europe is in the interests of both sides. China’s official position towards the European debt crisis is consistent and straightforward: China firmly believes that the EU is able to overcome the crisis and China is ready to offer any help if it is necessary.

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