From Europe to China: A New World Order?

With Europe in economic turmoil, political leaders are now looking to China to boost the stability of the eurozone. French president Nicolas Sarkozy has made an appeal to Chinese President Hu Jintao to take an active part in financing a recovery in Europe. The United States are similarly facing fiscal difficulties and some view this as a shift in status, with China emerging as an economic leader.

Since a series of reforms in the late 1970’s, China’s economy has grown at an unprecedented rate. These reforms sought to readdress aspects of the communist nation, allowing private enterprise and increasing international trade. China has gained much of its current wealth in exports, having established itself as a world leader across multiple industries.

Another reason for economic growth in China is a higher level of employment in manufacturing and service sectors. Large numbers of people have moved from rural areas into the large, expanding cities of the country to increase their earning potential.

Whilst China is, by any definition, a growing economy, there are doubts as to what measures it will take to support the euro. Private enterprise and urban population growth may have increased the wealth of the country, but it has also increased wealth inequality. China’s wealth distribution is such that it is both a global power and, for many, a poor and developing country. Any large investment may cause social unrest in China, since the communist government might be seen as prioritising foreign investment above civil interests.

China has recently tightened lending to businesses in the country, following concerns over consumer debt and demand in the market. As a result of restrictive measures this year, inflation rates have eased for the third month in a row. Further details will be made public in China’s annual economic working conference in December.

Whichever move China makes next, it is likely to have widespread implications. China has a reserve fund exceeding £1.8 trillion, and is being called upon to play a role in European recovery. China could potentially buy bonds from struggling countries such as Italy. This would help European countries that lack investor confidence. Chinese government would face the task of risk budgeting and, unsurprisingly, want to see a realistic return on their investment (and negotiate additional terms).

Alternatively, China could refuse aid altogether. The complication with this option is that much of China’s economy rests on exports to Europe, and so it is in the country’s interest to increase European stability. In the private sector, Chinese companies are willing to invest in struggling European businesses (two Chinese investors, for example, have recently put in a bid to buy Swedish Auto company Saab). Private investments use analysis services such as APT, but here the focus is more financial than political. On a larger, national level China may want to avoid involvement in European politics, and so payment to the IMF (which can then lend to Europe) may prove a more viable option.