The wildest European optimists have painted China as Superman, poised to swoop in and save Europe, its biggest trading partner, from disaster. However, Patrick Chovanec, a professor at Tsinghua University’s School of Economics and Management in Beijing, compares the world’s second-largest economy to a less heroic cartoon character: Wile E. Coyote, Roadrunner’s archenemy.
“He’s running and running and goes off the cliff, and as long as he doesn’t look down, he’s fine. But when he does ... he drops,” Chovanec said.
Whether or not he is right — and other analysts are more optimistic — the comparison explains why Beijing is happy to see the European debt crisis dominate the G20 summit.
Chinese President Hu Jintao (胡錦濤) told reporters that he was following the crisis closely as he arrived in Europe on Tuesday, adding: “We are convinced that Europe has the wisdom and the competence to overcome the current difficulties.”
Yet even before Greece’s proposal of a referendum threw the bailout into doubt again, China was playing down its own potential role in any deal.
The eurozone bought 281.9 billion euros (US$388.4 billion) of Chinese exports last year. At the very least, China’s leaders must prevent European woes from turning a desired cooling of their domestic economy into a hard landing. A growing number of observers, like Chovanec, think a correction is due in any case because the country’s spectacular growth rate (10.3 percent last year) has masked equally spectacular problems: most obviously, a property bubble and frightening levels of local government debt and illicit loans.
It is not hard to see why China’s leaders worry. Even in the boom years, unrest has soared. Economic gripes can quickly play out on the streets: While European leaders gathered in Brussels to bash out a deal on Oct. 26, protesters threw rocks, blocked a highway and torched vehicles in an anti-tax riot in Zhili, Zhejiang Province.
Some firms are already feeling the pinch from Europe’s troubles; last month’s growth in exports to the eurozone was less than half of August’s level. Usually, the Jiangbei Yichuan Electronics Co in Ningbo sells between 10 million and 20 million yuan (US$1.6 million and US$3.2 million) worth of blenders to Europe annually. However, this year, plummeting demand and pressure to lower prices mean it will sell perhaps 4 million yuan worth, Jiangbei Yichuan production manager Miss Xu said.
“The impact is obvious. After workers’ salaries and other costs, we are making almost nothing at all [on those sales],” she said.
In 2008, as exporters struggled, Beijing announced a 4 trillion yuan stimulus package that helped domestic growth recover quickly and spurred the first round of “China saves the world” headlines. This time, things are not so simple. Much of the stimulus came in the form of a credit binge; now the hangover has arrived.
Take the businesspeople of Wenzhou. Renowned for their entrepreneurial spirit, they turned to the murky underground market and its eye-watering interest rates when the government tightened official lending to stop the economy overheating.
Then wages and costs began to rise, and orders declined owing to the West’s new slowdown and an appreciating yuan. Unable to pay back loans, at least 80 bosses disappeared, declared bankruptcy or even killed themselves.
Some see Wenzhou as the canary in the coal mine; others, as an anomaly.
Gavekal-Dragonomics managing director Arthur Kroeber said there were serious problems in the Chinese economy, but “nothing to make me think it’s going to come crashing to a halt any time soon.”
The stack of bad debts can still be worked through, he believes. While the barely occupied “ghost cities” reveal high-end property bubbles in several places, there is an overall housing shortage. And a shock from Europe is unlikely to be as severe as 2008, he argued.
Growth slowed to 9.1 percent in the third quarter of this year and Standard Chartered has just projected a rate of 8.5 percent for 2012 to 2013.
However, if it slowed to 7 percent, “that wouldn’t be a disaster,” Kroeber added, particularly given that the number of people joining the workforce is falling.
Certainly, China needs European growth to hold up, but it will not risk its vast foreign reserves to shore it up.
The Chinese public are unlikely to react well to what they would see as “giving money away to Europeans who are much, much wealthier,” said Michael Pettis, a professor at Peking University’s Guanghua School of Management.
And if the bonds are made safe enough to satisfy Beijing, they should find buyers in Europe, he said.
There are suggestions that China could put in between US$50 billion and US$100 billion, but already, probably a quarter of China’s reserves — about US$800 billion — are euro-denominated. People expected it to accumulate similar bonds anyway; it needs to put its surplus somewhere, as European Financial Stability Facility chief executive officer Klaus Regling said in Beijing last week, just after the eurozone deal was announced.
“Whether or not to put money into Europe will be market-based behavior based on China’s consideration of its own interests. Europe needs money; China’s foreign reserves need to invest and to guarantee investment security. It is as simple as that,” spelled out a front page article in the popular state-run newspaper the Global Times on Tuesday.
“If we want them to chip into any new vehicle, we have to give them a guarantee. For policy and finance circles, the expectations [of China] are very low and hence realistic,” Centre for European Reform deputy director Katinka Barysch said.
Others wonder if China may go bargain hunting as struggling Europeans flog off assets.
“The debt crisis does offer China some kinds of business opportunities,” said Dai Bingran (戴炳然), director of the Centre for European Studies at Fudan University, Shanghai.
However, the firms able and willing to invest are often state-owned or state-linked, he noted, raising suspicions in Europe.
Chinese investment into the EU was just 0.9 billion euros last year: less than a fifth of the EU’s investment into China, and less than 2 percent of the EU’s total foreign direct investment. That reflects Chinese caution, but also, Barysch said, European wariness of selling China the things it most wants: infrastructure investments such as ports, or technology.
China’s other G20 priority will be fending off a renewed US push for faster appreciation of the yuan; they have noted the increasingly tough talk on trade as next year’s presidential race approaches.
“The economic feeling against China is returning,” said Shi Yinhong (時殷弘), an expert in international relations at Renmin University, in Beijing. “[However,] in an international forum, I don’t think many other countries will support them.”
The yuan has also appreciated against the US dollar, albeit at a much slower rate — about 7 percent since June last year — than Washington wants. In part, officials fear that rapid appreciation could hit exports. Chinese leaders have long pledged to rebalance the economy toward domestic consumption, but with little obvious result.
“The fundamental question for the G20 is: Where is the growth going to come from?” Chovanec said. “People should be asking whether China could become the source of global growth and not just propping up a few sectors [through commodity purchases,] but bringing broad, consistent, consumer-led demand. So far, the answer is no.”
China is not Europe’s banker, he argued, but a shopkeeper extending credit to a customer to shore up its sales.
“Rather than selling more than it buys from Europe, accumulating reserves and lending them to Europe to keep it on life support, it would actually be better for China to take the euros and dollars and spend them on American or European products and productive investments,” he said.
Additional research by Han Cheng
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