It must be quite interesting be in Mr. Wen Jiabao’s shoes at the moment.
The Premier of the globe’s second largest economy is living in a world that seems to be on the brink of a recession due to sovereign debt crisis in Europe and lack of recovery in the US.
However the relationships these two troubled (or shall we say trouble causing) parts are having with China can’t be more contrasting. While Eurozone is imploring (read: pleading) him to buy sovereign bonds of Italy, Spain & Co., the US is considering Senate legislation to force Beijing to loosen controls on its currency. Humble request and arrogant forcefulness together, wow!!
The Chinese are not responding to either of these gestures and rightfully so. Like every country, they are acting in their best interest. Let’s start with the US first. ‘China bashing’ seems to have become a popular past time in the US in which citizens and politicians indulge alike. To me, it is just a vent of their frustration with the current situation for the former and an excuse to cover their own shortcomings for the latter.
China, has every right to decide its currency policy. The Americans had absolutely no problem with the same when they were relocating their factories (and jobs) to low-cost China during the 90s and now they are crying hoarse about the Chinese destroying millions of jobs in the US!! If this isn’t hypocritical, I don’t what would be. Also, as the holder of around 8% of American debt, there is nothing wrong with China asking the US to put its house in order.
But there is some good news for the Americans; China should be appreciating the Yuan in the near future . This is not because US wants it to but the country needs to use the same as a tool to curb the stubborn inflation plaguing it.
Europe is a bit trickier. China clearly can’t allow an extreme depreciation of the Euro as that is the only other alternative they have to the US Dollar to park its foreign reserves. The country has enough muscle, but doesn’t feel comfortable in flexing it at the moment, to substantially contribute to bond buybacks of Spain and Italy by ECB. No one doubts that China can do better than its current stand of “the real solution of the European sovereign debt crisis has to be done by Europeans themselves.”
If only the European policymaker can read between the lines in the above statement!!
The Chinese aren’t talking about cutting fiscal deficits here by the peripheral EU countries (even if they are, it is not their top priority). They are covertly asking for one thing that they need most desperately at the moment, the one thing that neither the US is being able to provide them (at least not as much as it used to) nor are they able to create at home – growth markets for Chinese products. China would have absolutely no problems in writing a few checks if only the EU opens up its markets to the country as much as it wants them to. Of course, Germany, which is also a top exporter in the world would not be happy with this but by shooting down the proposal for Eurobonds time and again, it isn’t making things any better for the Eurozone. Either ‘Open markets to China’ or ‘Issue Eurobonds’ – the writing is on the wall for the Germans. The sooner they decide, the better it shall be for the markets and for the world economy.
Also the size of bond buyouts from China shouldn’t be overestimated. Their coming to the rescue would have more of a symbolic significance to calm the financial markets than anything else. But EU politicians who are struggling to rein in the contagion fears shall take that with both hands.
In conclusion, the growth in US is going to be painfully slow and there is not much China can do about it. The Americans need to take politics out of economics and come up with a robust plan if they are to get out of the woods. As far as the European go, “Give me your consumer markets and I shall take care of the financial markets” seems to be the message from China to them. I have no doubt the EU policymakers are aware of this. It is just that, for once they all (read: Germany & France) have to arrive at a consensus and time is not a luxury that they have right now.
Tanuj Khosla is currently working as a Research Analyst at 3 Degrees Asset Management, a fund management firm in Singapore. He can be followed on Twitter @Tanuj_Khosla. Alternatively he can be reached at firstname.lastname@example.org. Views expressed are personal.