China Could Save the Eurozone, but at What Cost?
Friday, October 28, 2011
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Following the E.U. news of an initial plan to resolve the Eurozone crisis, the relief felt in the world’s financial markets was almost palpable. The objective of the plan that pertains to the shoring up of the European Financial Stability Facility includes, among other things, creating a special purpose vehicle to attract and obtain private funding that would leverage the fund well beyond its original value.
Enter China, a.k.a. the white knight. The world’s second largest economy and the driver of the world’s growth could play a major role as a contributor to the Eurozone’s emergency fund. However, analysts point out that how much involvement will be dependent on several factors, not the least of which is the Chinese government’s ability to justify their possible financial involvement in the Eurozone economy, which many Chinese perceive as a significant credit risk.
According to one government policy professor in China, the Chinese populace has become increasing informed, and critical, of the Beijing government. And should the Eurozone crisis fail to engender confidence among its own populace, and continues to spur chaos, dissention and anarchy instead, then the Chinese people won’t have confidence in the Eurozone’s political will to resolve the crisis. In that case, Beijing will be viewed as having made a major policy blunder, and likely lose the confidence of its own people.
According to two government officials from Beijing who are members of the People’s Bank’s monetary policy committee, the Eurozone leadership must first satisfy some key criteria, a “tit for tat,” as it were. At the onset, Beijing must be provided with strong guarantees that its investment will be safeguarded. Too, public “official” criticism of China’s monetary policy must cease. In the not too distant past, such criticism – usually coming from the U.S. – has been seen as a tremendous source of tension between the trading partners. Another possible condition might be to denominate a portion of China’s contribution in the Chinese Renminbi or the Yuan as it is also familiarly known, as a way to protect the Chinese investment against fluctuations in the currency; over the past three years, the Yuan has gained nearly 20% against the common currency Euro.
Even now, policy leaders from the European Union are wrangling for position. The French president, Nicolas Sarkozy, called the Chinese president, Hu Jintao, shortly after the summit concluded to discuss China’s possible involvement though no details of the call were forthcoming. The head of the EFSF, Klaus Regling, is also now in Beijing to discuss the matter with senior government officials.
Analysts believe that China might be willing to contribute up to $100 billion tapped from their forex reserves, which total nearly $3,200 billion. One insider privy to Beijing’s thinking believes that a contribution of even more than $100 billion could be worked through provided the conditions were right.
Not everyone agrees that asking for China’s help is a good or smart move. One critic believes that the political cost is worrying, given that a non-Eurozone nation would yield significant power over the Euro’s fate.
Source : eToro Blog
Enter China, a.k.a. the white knight. The world’s second largest economy and the driver of the world’s growth could play a major role as a contributor to the Eurozone’s emergency fund. However, analysts point out that how much involvement will be dependent on several factors, not the least of which is the Chinese government’s ability to justify their possible financial involvement in the Eurozone economy, which many Chinese perceive as a significant credit risk.
According to one government policy professor in China, the Chinese populace has become increasing informed, and critical, of the Beijing government. And should the Eurozone crisis fail to engender confidence among its own populace, and continues to spur chaos, dissention and anarchy instead, then the Chinese people won’t have confidence in the Eurozone’s political will to resolve the crisis. In that case, Beijing will be viewed as having made a major policy blunder, and likely lose the confidence of its own people.
According to two government officials from Beijing who are members of the People’s Bank’s monetary policy committee, the Eurozone leadership must first satisfy some key criteria, a “tit for tat,” as it were. At the onset, Beijing must be provided with strong guarantees that its investment will be safeguarded. Too, public “official” criticism of China’s monetary policy must cease. In the not too distant past, such criticism – usually coming from the U.S. – has been seen as a tremendous source of tension between the trading partners. Another possible condition might be to denominate a portion of China’s contribution in the Chinese Renminbi or the Yuan as it is also familiarly known, as a way to protect the Chinese investment against fluctuations in the currency; over the past three years, the Yuan has gained nearly 20% against the common currency Euro.
Even now, policy leaders from the European Union are wrangling for position. The French president, Nicolas Sarkozy, called the Chinese president, Hu Jintao, shortly after the summit concluded to discuss China’s possible involvement though no details of the call were forthcoming. The head of the EFSF, Klaus Regling, is also now in Beijing to discuss the matter with senior government officials.
Analysts believe that China might be willing to contribute up to $100 billion tapped from their forex reserves, which total nearly $3,200 billion. One insider privy to Beijing’s thinking believes that a contribution of even more than $100 billion could be worked through provided the conditions were right.
Not everyone agrees that asking for China’s help is a good or smart move. One critic believes that the political cost is worrying, given that a non-Eurozone nation would yield significant power over the Euro’s fate.
Source : eToro Blog
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