In These New Times

By Li Hong

Vice-premier Li Keqiang’s op-ed piece on Spain’s leading newspaper El Pais and his high-profile visit to Spain, Germany and Britain are to send reassuring signals to a jittery bloc of a continent that China is firmly behind Europe and their common currency, euro.

Beijing’s affirmative move at the start of 2011, bulwarked by its huge hard currency reserve widely estimated to have exceeded $2.8 trillion at the end of 2010, speaks of its intention that China does not want the euro-zone sovereign debt crisis to escalate and envelop more countries, dragging Europe into a financial quagmire.

China does not want another financial meltdown in Europe, on a scale identical to the 2008-09 global crisis and a subsequent colossal recession originating from U.S. sub-prime mortgage debacle, to give the world a double whammy and impede China’s rapid economic growth. Beijing is to try all at its capacity to prevent the worst scenario from happening.

China, the world’s second largest economy, has bought Spanish government bonds and will buy more euro-denominated securities in the future, Li wrote in his article. The declaration itself should boost bond sales of Madrid, which has been speculated to be the next to collapse under rising public debts and have to accept a bailout, following the heels of Greece and Ireland. An economic and financial rescue for Spain would be far bigger than anything seen to date in E.U., because the size of Spanish economy is twice that of Greece, Ireland and Portugal combined.

China’s extending a helping hand to Spain is of economic significance as well as good will. The logic is clear: If euro-zone fiscal woes worsen, bringing down Spain, the fifth largest economy of the European Union and eventually lead to a disintegrated E.U., the evolving tumult will gravely impact China, as a chaotic and destitute Europe is the least this country wants to see. A stable and prosperous Europe serves China’s interest.

The stake is high if E.U. goes under. As each other’s biggest trade partners, the two have huge mutual benefits on the line. Beijing feels duty-bound to keep the partner solvent and humming in time of need. It is also a manifesto of centuries-old Chinese culture to stand firmly behind a friend who has done good to you.

Some analysts say the U.S. government policy to extend Bush-era tax cuts to all American families despite its mountain-high national debts and the Federal Reserve’s “quantitative easing” monetary policy have drawn gripes of both Europe and China, as the extreme measures not only will risk U.S.’ own economy but also endanger the global one, which is in an anemic recovery. Their consolidated stance in opposing “irresponsible” U.S. economic policies has made the two closer in relations.

By printing more money and buying long-term U.S. debts, the world’s largest economy is flooding the market with paper bills, effectively dragging down the value of the dollar assets. Also, an over-supply of the dollars has depreciated the currency itself, and caused considerable price rises in oil, food and other key commodities. As a result, inflation has raked up in November and December in China and other emerging economies.

In sharp contrast, the zone-using countries are not liable to launch its version of “quantitative easing” by printing euros and buying the debts of its troubled members. The bloc, led by Germany and France, has pursued a policy of fiscal discipline, because it believes simply by printing paper bills will eventually lead to inflation. After this bout of crisis, all euro member countries are expected to rectify irregularities in their fiscal plan implementation, and put their respective economies always on a sustainable track.

In addition to purchasing Spanish debts, Li said that China cherishes the fiscal discipline measures taken by Madrid to prevent its public debts from amounting and exploding. The belt-tightening austerity, though painful, should put a lid on debt and regain Madrid fiscal health in the coming months. To back up Spanish recovery, Li suggested more Chinese travelers visit the scenic country, and more Chinese businessmen invest in local manufacturing and service sectors, creating jobs and tax revenues.

Li, in his article, attributed China’s economic success story to a capstone of opening the country up to foreign investment, laid by former leader Deng Xiaoping. Without that policy, China couldn’t have attained its prosperity today. For Spain and other E.U. countries, opening up to China and embracing Chinese investment will also create enormous opportunities for them.

Among many Chinese, an emerging consensus is that China cannot afford to see Europe fail, and, presumably, Europe also wants China to succeed.