It rightly made news when China suddenly emerged as Greece’s economic savior of sorts. It happened around the time when credit ratings agency Moody’s had downgraded the country’s rating to junk level, which means that investing in Greece or lending it money was a high-risk proposition.
Even though the EU and IMF had thrown it a credit line to bolster its credit-worthiness, the markets were not convinced.
In Germany, the EU’s biggest economy, the move to bail out Greece wasn’t popular at all. The country faced economic ruin leading to political and social instability.
The austerity regime imposed on Greece by the EU and IMF was creating turbulence and Greece’s socialist government was (and still is) at its wit’s end.
It was against this backdrop that China entered into a series of bilateral agreements with Greece to further broaden China’s economic horizon, that, in turn, will help Greece at a very difficult time.
It must be noted that China is not engaging in such economic deals out of a sense of philanthropy, but because they make political and economic sense. Chinese Vice Premier Zhang Dejiang (張德江) made two visits to Athens in one month, to finalize deals worth billions of dollars in shipping, tourism, telecommunications and more.
It is reported that the 14 deals with Greece amounted to the biggest single investment by China in Europe, though no official figure has been announced.
As for Greece, it bolsters its economic situation at a critical time. By investing in Greece in such a public and dramatic way, China has expressed its confidence in Athens’ capacity to successfully deal with its debt situation.
“I am convinced that Greece can overcome its current economic difficulties,” Zhang said. Such a vote of confidence was sorely needed by Greece in its current economic travails.
Of course, it also provides China with a useful conduit to expand its economic and political tentacles into other countries in the EU, especially Portugal, Spain, Ireland and the Balkans.
Even the UK is not looking good, with a budget deficit of around 11 percent of GDP, close to that of Greece. Its total debt is believed to be the second-biggest in the EU after Ireland.
Although China’s economy has its own problems, it does have large foreign currency reserves from trade surpluses, particularly with the US. It is estimated to have more than US$2 trillion in foreign currency reserves, and rising.
China’s annual trade surplus with the US is rising at more than US$200 billion a year, and another US$100 billion with the rest of the world. Which means that its reserves are growing at the rate of more than US$300 billion a year. China, is able to play politics with its money to expand its political and economic reach into Europe.
Although China has large foreign exchange reserves, it still has a fairly serious problem of indebtedness. The official figure of its debt at 20 percent of GDP is simply, like its other statistics, not believable. Victor Shih of Northwestern University in Illinois, reportedly predicts China’s debt — including the debts of local instrumentalities and state-funded debts — will be about 96 percent of China’s GDP by next year.
However, like in Japan, China’s debt is mostly internally funded, through the low interest-bearing savings of its hard-working and thrifty people. It is still debt, though. If there were to be a loss of faith in the government, this could lead to a run on government banks and other related agencies.
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