China sweeps up American crumbs in debt-stricken Europe

On Thursday, German Chancellor Angela Merkel began a visit to China. This could come as a routine piece of news about foreign policy activity of one of many world leaders, but there are too many details pointing to the fact that the visit is far from being a routine one.

To start with, it is the second visit to China by the head of the German government this year – which in itself is highly unusual.

Second, the usual entourage surrounding visits by Western leaders to China – all the fuss concerning "human rights" and press freedom – this time is obviously subdued. A German official did say before the visit that Ms. Merkel will raise the issue of the freedom of the press and the topic of human rights in her talks with her Chinese counterpart Wen Jiabao, but that was clearly admitted only after German journalists pressed him for an answer.

Indeed, the German Chancellor's role during this visit resembles that of a petitioner, and Ms. Merkel may hardly feel herself in a position to demand anything. As the acknowledged leader of the crisis-stricken European Union, she is much more concerned with the issue of European sovereign debts and whatever assistance Europe may receive from China, rather than with pressing Chinese authorities on anything – least of all about their internal affairs.

And as The Wall Street Journal reports, the main topic of Ms. Merkel's talks in Beijing is the issue of Chinese aid to euro zone. After meeting with the German Chancellor, Chinese Premier Wen said that China will continue to buy European bonds in a bid to help the euro zone resolve its debt crisis, and underscored Europe's growing importance to the Chinese economy.

But, the story in the WSJ goes on, "Wen stopped short of concrete pledges and noted that China's purchases would require 'fully evaluating risk,' suggesting that meaningful aid still can't be assured."

Ms. Merkel's visit to China reveals a multifold problem. First, it shows that the crisis in Europe is much deeper than the official statements by EU political leaders would have one believed. Turning to China for help is probably something that no one in Europe might have dreamt of in their worst nightmares some ten or even less years ago. But while the US is issuing billions, if not trillions of "empty" dollars at a frighteningly accelerating speed, and itself is plunging deeper and deeper into debt, there seems to be no other way out other than turn to China as a last resort.

On the other hand, for China, Europe remains the second largest market after the US, and Germany is the leading trade partner in Europe. With enormous stocks of unsold goods amassing in China, the risks of losing the market are too high. Therefore the pledge to assist the eurozone comes only naturally and appears to be to mutual benefit.

Still, the similar experience of China's role in the US sovereign debt cast some doubts on the prospects for mutual salvation. Now that the amount of US debts in Chinese hands has exceeded $3 trillion (with over $1 trillion in Treasury bonds alone), both China and the US have found themselves in a "vampire – victim" situation with neither being able to break up the bond between them.

China cannot withdraw its assets from US equities for at least two reasons. First, there simply isn't any other equity market comparable in volume with the American one. And second, any attempt to withdraw a considerable portion of Chinese-held assets from American equities will result in an immediate sharp decline of the remaining assets.

For the US, this kind of relationship, on the one hand, allows them to go on with their policy of building a global pyramid of empty dollars. On the other hand, politically it keeps their hands tied and prevents them from taking any harsh measures against China on the global arena.

It is highly doubtful that German financiers and politicians do not see all the risks involved in allowing broader access for China to the European equity market. But that brings us back to the first supposition that the debt crisis in Europe is much deeper than European leaders would like to admit, and China may well serve as the straw the drowning Europe has no other option but to cling to.
Boris Volkhonsky, senior research fellow, Russian Institute for Strategic Studies


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