This past week I was in Paris when share prices of France’s largest banks Société Générale, Crédit Agricole, and BNP Paribas plummeted due to concerns over exposure to Greek debt. At the same time, fears about Italy's fiscal problems embroiled global markets. At every meeting people asked me, “Will China bail out Europe?” Even rumors that China would step in and buy Italian bonds calmed markets and share prices rebounded.
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Some analysts like Fareed Zakaria have called on China to become a "responsible stakeholder" by buying Italian bonds because the "crisis will quickly morph into a global one, possibly a second global recession. And a second recession would be worse because governments no longer have any monetary or fiscal tools."
Zakaria argues a weak Europe hurts Chinese interests as it is now China’s largest export destination, accounting for 22 percent of total exports. However, it is doubtful China will be able to save Europe — only Europe can save Europe.
Since the crisis started, far too many politicians have looked for easy solutions like lower interest rates rather than restructuring economies to rebuild confidence and create job opportunities. Buying Italian bonds will not save Europe. It will only avert a crisis until a few months down the line when fears about Spain or Portugal hit the world.
Even though Prime Minister Wen Jiabao said China would be a friend to Europe, he did not specifically mention what his nation would do. Wen's options are limited because of raging inflation that hit 6.2 percent in August, rising local government debt and non-performing loans. Domestic pressure is also pushing the government to be cautious in buying bonds. The Chinese people don't want to see the nation’s reserves drop in value if the Euro falls just as China's U.S. dollar holdings have lost value.
A growing domestic chorus argues China should save its money to invest in China. After all, even though China has emerged as an economic superpower, far too many people are still struggling to make ends meet. They don’t understand why a developing nation should bail out developed nations. Italy’s per capita GDP is triple that of China's. If German and Finish politicians face difficulty gaining support to bail out its neighbors it is even harder for the Chinese.
A far more likely scenario than China buying up European bonds is that it will buy more products and natural resources from other nations. In the short-term this might not help as much, but in the long-term it will force European companies to innovate for the Chinese market.
Case in point, China is actually running a trade deficit with Germany. That is right -- China buys more from Germany than Germany buys from China because Germany actually produces something Chinese want, capital equipment, and is willing to sell to them.
In the last year China has run a $12.7 billion deficit with Germany from a $3.3 billion surplus in 2007. It is also running a $43 billion deficit with Australia as it secures access to natural resources. China runs a surplus with the United States because there are structural problems in the U.S. The country does not produce enough of the items China wants and the ones China does want, the government bans in the name of security risk.
Part of the surplus will actually be solved by Chinese consumers who are now demanding better food, automobiles and homes. According to the U.S. Department of Agriculture, exports of pork to China increased fivefold in the last year to 200 million tons. Some analysts expect China's demand for corn from the U.S. to reach 15 million metric tons within three years.
China is being a responsible global stakeholder by stepping in to calm markets and ensure the fiscal viability of its own nation. It is taking care of its internal interests and helping where it can globally. But the Chinese know that buying bonds is not a long-term solution. Western Europe and America need to focus on reforming their economies to produce items the Chinese want. They need to build consumer confidence through job creation and stop dreaming that a Chinese bailout will work.
Shaun Rein is the founder and managing director of the China Market Research Group (www.cmrconsulting.com.cn) a strategic market intelligence firm, and is based in Shanghai.
He is the author of the upcoming book “The End of Cheap China: Economic and Cultural Trends that will Disrupt the World” published by John Wiley & Sons in the U.S. He does not own shares in any company mentioned. Follow him on Twitter at @shaunrein.