In years to come, economists and historians might hark back to this week as the moment the balance of world power tipped toward China. The signs have been there for while, but the symbolism is especially potent now, in the few days between yet another euro-zone crisis summit, held in Brussels on Oct. 26, and the Nov. 3-4 G-20 summit in Cannes, France. The reason for choosing this as the watershed is crudely financial: at the Brussels summit, European leaders made a previously unthinkable appeal for China to use its $3.2 trillion currency reserves to help dig the euro out of its debt hole. And while the euro zone is anxiously awaiting an answer, China inscrutable about its intentions is milking the moment.
China is being targeted as a potential investor as part of a complicated scheme agreed to at the summit to leverage Europe's bailout fund up to €1 trillion ($1.4 trillion), along with other potential outsiders like Russia, Brazil, Middle Eastern countries and the International Monetary Fund. On Oct. 27, French President Nicolas Sarkozy, who is hosting the Cannes G-20 gathering, phoned Chinese President Hu Jintao to seek backing. "If the Chinese, who have 60% of global reserves, decide to invest in the euro instead of the dollar, why refuse?" Sarkozy said after his call. "Why would we not accept that the Chinese have confidence in the euro zone and deposit a part of their surpluses in our funds or in our banks?"
China can certainly spare the €100 billion ($140 billion) reportedly being discussed among officials. The real question is why China would want to plant it in a low-growth region like the euro zone. The bond-leverage scheme has already generated its share of criticism, and Greece's recently announced euro referendum only adds to the uncertainty and risk. The Chinese government's official news agency, Xinhua, cautioned in an editorial that "emerging economies should not be seen as Europe's Good Samaritans."
Yet there are still strong reasons that China might park some of its funds in the bailout scheme or some other bond offering. One is that it is already heavily involved: a quarter of China's currency reserves are thought to be held in euros, and Beijing has been a regular buyer of euro-zone bailout bonds in the past. Over the past year, the Chinese government has made several pledges to purchase European debt issues, both at the bilateral level with indebted countries including Portugal, Greece and Hungary and toward the euro zone as a whole.
China also has a vested interest in shoring up its biggest trading partner, with which it had bilateral dealings worth €363 billion ($503 billion) last year, almost 10% of the total global-trade flow. China's growth prospects depend heavily on Europe's consumers, whose average per capita GDP is about $32,500, compared with about $4,500 in China. A weaker euro would make Chinese exports more expensive for Europeans. And maintaining the euro as a reserve currency aids China's efforts to counterbalance the U.S. dollar and create a multipolar global economic system.
But significantly, this hands China a remarkable opportunity to extract concessions, both economic and political. In September, Chinese Premier Wen Jiabao implied an effective quid pro quo when he asked Europeans to "put their houses in order," almost as a condition for China's "extending a helping hand."
In trading terms, this might be reflected in the recognition of China's status as a "market economy" when it comes to European Union trade sanctions, a measure that could boost exports otherwise hindered by tariffs. And since the E.U. currently has some 55 anti-dumping measures in place against China, individual member states might also be pushed to ease their stance on future sanctions. Other trade issues might slip from the agendas, to the chagrin of European exporters, who regularly gripe about Chinese rules on foreign ownership, subsidies reserved for Chinese firms, lack of access to the public-procurement market and selective enforcement of intellectual-property rules.
These concerns were already raised in July by the European Council on Foreign Relations, which published a paper titled "The Scramble for Europe" on China's "game-changing" economic presence in Europe. It warned that if China became too involved in major financial, investment and public issues, it would leave the Europeans little leverage to improve their access to the same sectors in China, which are mostly closed or controlled.
The political implications are potentially even more troubling for Europe, which has long considered it a right, even a responsibility, to criticize China on issues like human rights and environmental protection. It could mean, for example, that the E.U. lifts its ban on arms sales to China, imposed in the wake of the 1989 Tiananmen Square massacre, or that the Dalai Lama receives fewer invitations to meet European leaders. Fredrik Erixson, director of the European Centre for International Political Economy, a Brussels-based think tank, says that even if there are no formal trade-offs, Beijing could expect generous favors from Europe after years of what it considers intrusive interference. "China wants something more: international recognition in one way or the other, or a Europe that in Beijing's view stops poking its nose in internal Chinese politics," Erixson says.
At Cannes, Chinese leader Hu will doubtless refrain from any early commitment on the euro-bailout scheme, while soaking up the flattery from Europe's pleading leaders. But he will be aware that as China consolidates its emergence as a world player, any investment risks in the program would be a small price to pay for the wave of European goodwill it would generate.