With the ink drying on a potential agreement to stabilize the European financial markets, the head of the European bailout fund arrived in Beijing on Friday as EU leaders look for China to further tap its reserves in support of the rescue package. From Bloomberg:
The European Financial Stability Facility may explore setting up a special purpose vehicle with the IMF, Klaus Regling, the EFSF’s chief executive officer, said at a briefing in Beijing today. Separately, Chinese Vice Finance Minister Zhu Guangyao said his government wants to hear about particulars such as the extent of loan guarantees to countries including Italy, and how the senior-debt portion would be structured.
European leaders aim to tap China, holder of the world’s largest foreign-exchange reserves, for help after moving yesterday to contain the crisis by writing down Greek debt and targeting an expansion of the EFSF to about $1.4 trillion. China may seek to increase its influence at the IMF, a global lender of last resort, as a quid pro quo for contributing, said Tomo Kinoshita, an economist at Nomura Holdings Inc.
French President Nicolas Sarkozy spoke with Chinese counterpart Hu Jintao by phone yesterday and the two agreed to “cooperate closely” to ensure global growth and stability, Sarkozy’s office said in a statement. Regling said that he didn’t expect a “precise outcome” from talks with Chinese officials during his trip.
While China has incentive to support its largest trade partner, The New Yorker’s Evan Osnos writes that it will need to satisfy a public which is questioning the logic of assisting the Europeans when problems persist back home:
By Friday afternoon, China was edging toward a plan that could free up a hundred billion dollars, but it still faced one potentially enormous source of opposition: its own citizens. “The chief concern of the Chinese government is how to explain this decision to our own people” Li Daokui, a member of China’s Central Bank Monetary Policy Committee, told the Financial Times. Based on the Chinese reaction on Friday, Li knows his constituency. “Why do we, once again, have to give what we’ve earned—through blood, sweat, tears—to those rich and lazy Europeans?” commentator Songzhe wrote on on Weibo, the Chinese equivalent of Twitter.
For the European plans to succeed, Sarkozy and others will need to find creditors willing to boost the fund, and Chinese reaction immediately gravitated to the sense that this help should not come cheap. “You want support? Fine, on these conditions,” commentator BillyBW began. “1. Recognize China’s market-economy status right away; 2. Never again mention Taiwan, Tibet, Xinjiang, and the South China Sea; 3. Allow China to purchase high technology in the fields of weaponry, aviation, information technology, pharmaceuticals, environmental protection, industrial manufacturing, etc. President Hu should learn from Kim Jong-il: Don’t hand over a dime without asking for the world in return.”
In The New York Times, Arvind Subramanian argues that China should provide relief to Europe via the IMF rather than directly backstopping the bailout fund, and that European leaders would be wise to entertain China’s conditions:
China should demand nothing less than a wholesale revamping of the governance of the I.M.F. to reflect the current economic realities. Governance reform can no longer be just about the nationality of the I.M.F.’s managing director but should fundamentally be about who will have the greatest voice and exercise the most power in the new world.
Today, the United States and Europe each have effective veto power in the I.M.F. because important decisions require an 85 percent share of the vote. If China were to become the I.M.F.’s major financier it should have veto power on terms equivalent to those of the United States. Europe’s power should be reduced commensurate with its transition from creditor to potential borrower status. Supplicants, China should insist, cannot have veto power in a financial institution.
The Chinese government could then trumpet a nationalist achievement — equal status as the United States, and a greater status than that of Europe, in running the world’s premier financial institution — as the return for investing its cash abroad.
These demands would be legitimate and indeed be welcome for the world because they would tether China more firmly to, and create a stake for it in, the multilateral system. Those in the United States and Europe who would resist these changes should remember that the alternatives are worse. A China that uses its might bilaterally to gain narrow political advantages would be a worrying portent for the future when China becomes economically bigger and stronger. And a China that refuses to take the phone call at all could well push Europe off the cliff. Europeans are running out of options; debtors cannot be choosers.