China and the World

China’s euro fears

Chinese debate potential for break-up of the euro

Too big to fail?

James Carville, the US political strategist, once said that, should he be reincarnated, he would like to come back as the bond market, because then “you can intimidate everybody”.

Europe’s leaders won’t be chuckling at Carville’s quip this month, as pressure on the euro reaches new levels. And in China too, speculation is growing over whether the eurozone will disintegrate.

It’s a subject we have touched on before (see WiC124) but the sense of crisis has risen palpably in recent weeks. Over in Europe itself even sober newspapers like the Daily Telegraph have been running panicky headlines like “Death of a currency as eurogeddon approaches”.

Today’s meeting of European leaders in Brussels is being seen as crucial by Chinese observers, although similar summits have disappointed before.

In the more pessimistic camp is economist Han Zhiguo, whose Sina Weibo blog is followed by an impressive 3.81 million.

This week there was a typically bleak comment: “In February this year I led a delegation to Europe to study sovereign debt problems, and the conclusion was that a sovereign debt crisis will break out in Italy, Spain and France, and that the eurozone will disintegrate by 2012, so I recommended a significant reduction in China’s euro bond holdings. The eurozone is now showing signs of collapse and plummeting bank stocks are only the tip of the iceberg. Disintegration will bring global catastrophe and the Great Depression of the century. China holding €600 billion of foreign reserves will be deeply stuck.”

Cheerful stuff. But Wu Jiaxiang, another local scholar, noted on his own weibo that the euro would not be destroyed. Instead he predicts the crisis will lead to the creation of a new entity: the “European Political Federal Republic” and He Fan, a director at the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, also refuses to believe a break-up will occur. “As withdrawing from the eurozone will cause tremendous volatility, the split of the euro area and the euro’s collapse is a small probability event,” he writes.

Eastmoney, a website, interviewed two more experts for their views. Song Hongbing, author of a new book Currency War 4 (WiC is yet to get through the first three epics, we must admit), thought the idea of currency collapse was “alarmist”. Instead, he regarded the whole thing as a “political game” designed to force weaker nations to hand over their fiscal sovereignty to a new European finance ministry controlled by Germany.

Once that happens, Song thinks, the crisis will be contained by the European Central Bank. “As long as the ECB follows the Fed in printing money, there will be no difficulty. The euro-version of quantitative easing can be met with €2.5 trillion.”

Song even adds: “Which of the United States and Europe has a more serious debt problem? I think the US situation is worse. The size of the current bad debt in Europe is about €2.5 trillion, while the United States has at least four times that!”

Eastmoney also spoke to Song Guoyou, an associate professor at Shanghai’s Fudan University. He says Europe’s problems are best viewed by China as an opportunity. “If we say the financial crisis accelerates China’s growth as a world power, the emergence of the debt crisis will give China more opportunities to perform as a world power. After all, China has the world’s largest foreign exchange reserves: if in helping other countries, we can increase China’s influence, appropriate aid to Europe may well be a win-win decision.”

All in all, however, public opinion in China seems to be befuddled by the issue. An online poll of 38,000 respondents asked whether Europe’s debt crisis could be successfully addressed.

Marginally over 30% said ‘yes’, while 32% said ‘no’. The rest claimed to have ‘no idea’. Just like Europe’s leaders themselves, it seems.


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