December 9th, 2011
09:13 AM ET

Europe on a Chinese shoestring

Editor's Note: Yao Yang is Director of the China Center for Economic Research at Peking University. For more, visit Project Syndicate or follow it on Facebook and Twitter.

By Yao Yang, Project Syndicate

BEIJING – Will China help to rescue the euro, or not? In August, Premier Wen Jiabao said that China was ready to assist Europe in its hour of need. But, in December, at the Lanting Forum in Beijing, Deputy Foreign Minister Fu Ying declared that China could not. “The argument that China should rescue Europe does not stand, as reserves are not managed that way,” she announced.

For months, European leaders and International Monetary Fund officials have been hoping that China would lend a hand to save the euro. But Wen proposed certain conditions, including the European Union’s recognition of China as a market economy. Europe’s leaders, however, have not agreed to this or any other of Wen’s conditions. Hence, Fu’s insistence that China can do nothing to help.

Market-economy status is largely symbolic, but it is important to China. European Commissioners and lawyers are currently engaged in a heated debate about whether the World Trade Organization should automatically grant China this status in 2016. Whatever the outcome, the benefits are marginal; the primary benefit of market-economy status for China is that it would preclude anti-dumping charges under WTO regulations.

Nevertheless, it is a symbol that matters to China. Many Chinese believe that to deny China market-economy status is to dismiss the last 30 years of often wrenching reforms. Above all, China wants a sign of acceptance by the advanced Western economies, which continue to regard the country not only as repressive, but as representing an alternative economic model: state capitalism, rather than the free-market variety.

Both of these Western characterizations are too extreme. The Chinese system is authoritarian in many respects, but the picture is not black and white. After 30 years of transformation, China’s economy, society, and, to some extent, its political system, have changed profoundly.

To be sure, China’s government keeps a tight rein on the economy. At the same time, the private sector has taken off, and now accounts for two-thirds of China’s GDP and urban employment.

Despite this progress, the West seems to be losing patience with China. Before 2004 (when China’s burgeoning current-account surplus became an international issue), the West believed that China was moving in the right direction – becoming “more like us.” Now that belief is faltering, especially because China has become more assertive since the global financial crisis began in 2008.

But China’s assertiveness is not entirely groundless. Given its extraordinary economic record, China has reason to feel proud; and, having long been a student of the West, China has equal reason to ask why the teacher has gone so wrong.

In the end, admitting China fully into the international community would help to transform it into a more open society. But the West must keep in mind that China is not interested only in material benefits, such as access to Western markets, or a greater presence in international organizations. The Chinese also want respect.

Europe cannot afford to see the euro fail. But current proposals, such as national redemption funds, or a Europe-wide version with joint liability, would increase the burden on EU taxpayers drastically. Meanwhile, pressure on the European Central Bank to buy eurozone government bonds is placing the Bank’s credibility at risk. External help is the best solution to boost market confidence and save the indebted countries from depression and default.

A failed euro, moreover, would be bad for China, leaving the US dollar as the single international reserve currency. It would also mean that the European market, currently China’s largest source of export demand, would be far weaker.

But China will not provide substantial financial assistance without the EU’s ironclad guarantee of the investment. Equally important, China will withhold aid unless and until the EU meets certain conditions, including conferral of market-economy status. China has said what it wants. It is up to Europe to strike the deal.

The views expressed in this article are solely those of Yao Yang.

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Topics: China • Debt Crisis • Europe

soundoff (10 Responses)
  1. jal

    Beam me up Scotty...

    December 9, 2011 at 9:39 am | Reply
  2. j. von hettlingen

    China plays poker with the EU. It will help the countries in crisis, but with strings attached. If they reject the deal, they will have to default. Yet it will also hurt China due to interdependence in world trade. Both parties are well-advised to look for a win-win solution. This tug of war would be a waste of time and hurt each other.

    December 9, 2011 at 11:22 am | Reply
  3. Kailim

    The main problem is Europe does not treat China as equal partner due to superiority complex, different political system and etc. Whereas China concerns about the safety of her investment and some respect. No matter how China helped by buying her bonds in the past decade, America's defiance has actually taught China a good lesson.

    December 9, 2011 at 8:29 pm | Reply
    • Kailim

      When someone in need does not want to be your friend, do you lend him money?

      December 9, 2011 at 8:34 pm | Reply
  4. pmcdonald

    "state capitalism" is very effective at generating wealth

    December 10, 2011 at 4:46 am | Reply
  5. Carolina

    There is too much to touch on in this subject mttear, to get into here, but suffice it to ask: Are you one of those and I quote: "fanatical Crazy People"! Are you really that stupid! You say and I quote again: I doubt that anyone seriously thinks we have 30 times as many crazy people as Britain or Australia." Did you even think about what you typed there before you typed it! Do you even know what the true blue population of the United states is! when compared to either of those countries! And 30 times! What over inflated static nightmare have you been looking at! if at all. Most statistics are put together for more personal gains of a person or group of people in order to benefit them! More so than to give out an accurate account of anything. In other words for any one statistic you can find, I can find an opposing one. But back to this silliness.

    July 6, 2014 at 12:59 am | Reply
  6. Frank

    so. If the government tmroorow declares tea leaves the legal tender, than it's going to be tea leaves. most important, they have the largest ARMY in the world, BY FAR, to enforce their idea of what is money. Also, debt IS money in todays modern monetary system, it's the same in ALL modern economies. No debt means no money. Read up on the subject, please, I'm running out of space 

    July 21, 2014 at 12:04 pm | Reply
  7. Nashwa

    An isolationist America would be ideal from my pvcepertise. The US should behave like Switzerland. Far from being diminished, it would be greatly enhanced.Some good first steps would be for the US to withdraw from the UN and expel the UN from American soil, to close all US military facilities outside the US, to cease all transfers of American funds to other countries, and to sever our Internet connections to all but English-speaking countries. Robert Bruce Thompson

    July 25, 2014 at 7:01 pm | Reply
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