Euro debt crisis a win-win for China

PUBLISHED : Thursday, 03 November, 2011, 12:00am
UPDATED : Thursday, 03 November, 2011, 12:00am


A week ago European leaders finally clinched a complex deal to stem the euro zone's financial crisis in time to present a united front at this week's G20 summit on the global economy. There were questions about lack of detail and whether the numbers were big enough to head off another crisis down the road. But at least there was agreement on tackling debt that threatened another recession in developed counties. The only real wild card was China: would Beijing throw its financial clout behind the bailout?

That was before Greek Prime Minister George Papandreou threw all the cards in the air this week with his stunning decision to seek his people's consent in a referendum on a debt rescue from which his country is the main beneficiary.

The plan entails austerity measures that are deeply unpopular. A no vote would trigger the very outcome the deal seeks to avert - a disorderly, contagious Greek sovereign debt default and exit from the European currency, even assuming the euro zone is still prepared to advance the country's second debt bailout of US$139 billion in view of the referendum.

As a result the plan is in disarray, Papandreou faces a dangerous parliamentary confidence vote and the German and French leaders who forged the deal are shocked and angry with him.

China's cautious welcome to European consensus on the rescue now seems positively prescient. Beijing must be feeling relieved that it told the head of the European Financial Stability Fund that it wanted more clarity before committing to invest in a massive expansion of the fund.

For all that, it is doubtful Greece could have been saved from its debt trap for long. Europe's leaders must not let this incomprehensible setback weaken their resolve to contain the crisis and put their house in order. That is crucial for the clarity that Beijing not only wants if it is to help, but must desire.

Europe, after all, is its biggest trading partner and China is Europe's second biggest. China cannot afford a European re-run of the 2008 US financial crisis. It is in its interests to come to Europe's aid if a major investment can be structured to contain the financial risk.

The latest developments are a reminder that China has lost money in the past on sovereign fund investments and the need for caution. At the same time the resulting uncertainty will do no harm to Beijing's bargaining power for further market opening for Chinese products and investment, recognition of the mainland as a market economy and a greater say in the global financial system through increased voting power in the International Monetary Fund.

Contributing to the rescue could therefore be a win-win situation.