China could play key role in EU rescue

China is very likely to contribute to the eurozone's bail-out fund.

Story highlights

  • China is very likely to contribute to the eurozone's bail-out fund
  • Any Chinese support would depend on contributions from other countries
  • Beijing must be given strong guarantees on the safety of its investment

China is very likely to contribute to the eurozone's bail-out fund but the scope of its involvement will depend on European leaders satisfying some key conditions, two senior advisers to the Chinese government have told the Financial Times.

Any Chinese support would depend on contributions from other countries and Beijing must be given strong guarantees on the safety of its investment, according to Li Daokui, an academic member of China's central bank monetary policy committee, and Yu Yongding, a former member of that committee.

Financial markets reacted with relief hours after a European deal was agreed at a summit aimed at calming the two-year-long sovereign debt crisis. The plan includes recapitalising European banks, making them accept a loss of 50 per cent on their holdings of Greek debt and boosting the firepower of the rescue fund, known as the European Financial Stability Facility.

The S&P 500, which rose 3.4 per cent, is on course for its best monthly gain since October 1974. The FTSE All World stock index gained 4.1 per cent, its best one-day rise since May 2010.

Bank stocks also increased sharply with the S&P financials index gaining 6.2 per cent, led by big commercial banks. The dollar slumped 1.6 per cent, its biggest one-day drop since May 2009, as the euro surged more than 2 per cent, above $1.42.

"It is in China's long-term and intrinsic interest to help Europe because they are our biggest trading partner but the chief concern of the Chinese government is how to explain this decision to our own people," said Professor Li. "The last thing China wants is to throw away the country's wealth and be seen as just a source of dumb money."

He added that Beijing might also ask European leaders to refrain from criticising China's currency policy, a frequent source of tension with trade partners. The US argues that an intentionally undervalued renminbi unfairly supports Chinese exports.

In spite of discomfort among some Europeans about Chinese investment, the comments represented a fillip to eurozone leaders hours after a summit aimed at calming the two-year-long sovereign debt crisis.

With $3,200bn in foreign exchange reserves, roughly a quarter of which are believed to be held in euros, China could be willing to contribute between $50bn and $100bn to the EFSF or a new fund set up under its auspices in collaboration with the IMF, according to one person familiar with the thinking of the Chinese leadership.

"If conditions are right then something a bit above $100bn is not inconceivable," this person said.

President Nicolas Sarkozy of France welcomed the prospect of a Chinese contribution to the eurozone rescue package. "Our independence would not be put into question by this," he said in a television interview. "Why would we not accept that the Chinese had confidence in the eurozone and place a part of their surpluses in our funds or our banks. Would you rather they placed it with the US?"

Klaus Regling, head of the EFSF, was due to arrive in Beijing late on Thursday for discussions with senior Chinese leaders on whether and how much China might contribute. President Sarkozy telephoned his Chinese counterpart Hu Jintao a few hours after the summit ended to discuss the rescue plan but there was no immediate announcement on any Chinese involvement.

European leaders agreed that the EFSF would explore two plans to increase its remaining firepower from about €250bn to €1,000bn. One would be to offer investors insurance on selected government debt while the other would create a special fund in which countries such as China could invest.

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One condition China might ask for is that its contribution be at least partly denominated in renminbi, which would protect its investment against currency fluctuations. China would buy euro-denominated bonds but repayments would compensate for any changes in the value of the renminbi, which has appreciated nearly 20 per cent against the euro in the past three years.

Reflecting the unease in Europe, the head of Germany's industry association said he feared Chinese help could "come at some political cost". Hans-Peter Keitel told the FT: "Asking a non-eurozone nation to help the euro would give the other nation the power to decide the fate of the single currency."

The global focus on how China might contribute to the European rescue plan illustrates its increased influence on the world stage and many in Beijing believe this crisis presents an opportunity for it to display global citizenship and responsibility commensurate with its rising status.

Beijing's main concern is how any contribution to a European bailout will be viewed domestically by an increasingly informed and critical populace.

"Any mis-steps in helping Europe could cause problems with domestic public opinion -- the Chinese people will watch very carefully what their own government does," Prof Yu said. "European leaders also must have a clear plan of what to do and they must show China they have the political will as well as the support of their own people; if we see protests and chaos all the time, then China won't have confidence in Europe's political ability."