Only Europe can solve its debt crisis
China has a vital interest in preserving the stability of the euro zone amid a sovereign debt and banking crisis. And it has the means to buy up debt to boost market confidence. But speaking from a position of strength, Premier Wen Jiabao has set terms for a Chinese bailout of debt-laden developed economies, including putting their own houses in order and meeting political demands that mark a change of attitude.
China cannot grow in isolation from its great trading partners. That is a self-evident truth, but Wen had reason to invoke it in his keynote speech at the World Economic Forum in Dalian. Stalled economic growth in Europe and the US would have an impact on China's efforts to maintain high growth while controlling inflation. This is not a prospect that Beijing would relish in the lead up to next year's leadership reshuffle, amid calls for reforms to redistribute wealth and the revival of the old socialist slogan of 'common prosperity'.
As the biggest foreign holder of US debt, Beijing has been diversifying its holdings and will continue buying some European government bonds. But European nations still eye China's massive reserves, as evidenced by a recent Italian mission aimed at securing investment in strategic sectors of that country's debt-stressed economy. They should not be surprised, however, if Beijing is wary of feeding addiction to debt and fuelling aversion to the political pain that must be endured to bring it under control, restore confidence and enable a return to stable growth. Hence Wen's call for developed economies to put their houses in order before expecting any kind of bailout, in return for which China expects accelerated full recognition in the World Trade Organisation as a market economy and an end to trade restrictions.
Wen says China remains willing to invest. But there is no quick fix to Europe's dilemma: a vicious circle of deteriorating sovereign debt and doubts about the soundness of banking systems. More debt will only be negative for growth in the longer term. Unfortunately, the lasting solution - spending cuts, revenue increases and structural reform - carries the short-term risk of weakening demand and dragging out recovery, to the cost of Asian exporting nations.
While euro zone leaders agonise over a unified strategy to prevent debt default and possible contagion, and political rancour impedes fiscal responsibility in the US, Wen's demand that both put their houses in order may fall on deaf ears. The key to tackling the worsening euro-zone debt crisis - and preserving the currency union - is for the European Union to develop a coherent strategy for an orderly resolution that meets the concerns of the strongest member, Germany, about shouldering the costs of other members' imprudent policies.