Saving itself

The European Financial Stability Facility fund, targeted to top Euro1 trillion (HK$10.6 trillion), is the euro zone's last chance for survival. Hopes that China would ride in as Europe's white knight during the G20 meeting in Cannes last week did not come to fruition. As a cartoon in the People's Daily - showing an overweight European attempting to steal the dinner of a skinny Chinese man - suggests, there is little public appetite in Beijing for bailing out governments and citizens living beyond their means.

Despite having an estimated US$3trillion in foreign exchange reserves, it is not China's responsibility to 'save Europe'. Many in Brussels fear that only significant economic and political concessions by European leaders will persuade Beijing to provide the cash. The reality is that China will eventually lend a helping hand - not because Beijing wants to be a Good Samaritan but because economic catastrophe in Europe is not in China's or the Communist Party's interest.

Superficially, China's economy has largely decoupled from the West's since its economic growth is more dependent on domestically funded fixed investment than net exports or foreign direct investment. But politics rules economics in China and political priorities for the party are a much more complicated affair. When it comes to economic policy, the primary calculation is always based on what is needed for the party to remain in power.

Officially, unemployment in China is at a very manageable 4-5per cent. But these statistics measure less than one-tenth of the population. Unofficially, unemployment could be at least double that. This does not even include the estimated 200 million itinerant workers who fall in and out of work. This means that preserving and creating jobs is a priority for a regime that primarily holds onto power on the basis that it can provide economic prosperity to urban elites throughout the country.

Even though domestically funded fixed investment is the primary driver of economic growth in the country, the export manufacturing sector, which employs between 150million and 200million people, remains the most efficient generator of jobs in the country. China remains the world's subcontractor of choice and is the central hub of the production chain rather than the end consumer. An estimated 50-70per cent of China's trade is processing trade - that is, products entering China to be assembled before being shipped out again for consumers in other markets.

While the state-owned sector received three-quarters of the country's formal finance, my research suggests state enterprises are around three times more inefficient than export manufacturers in job creation.

This is where helping to stabilise Europe by bulking up its bailout fund comes in. China is committed to a state-led, fixed-investment model of growth for the foreseeable future. The party is desperate to ensure it remains the primary dispenser of business and economic opportunity. Since the private domestic sector - which received a fraction of the country's formal finance - is being deliberately suppressed, Beijing cannot afford any further deterioration in the European consumer market that would affect job maintenance and creation.