Yesterday, NPR ran a segment about Europe turning to China to help fund its bailout package, contrasting Arvind Subramanian’s view — that this signals an important shift in the balance of economic power — with my own — that China’s piling up of foreign currency reserves is part of the problem, and that if China wanted to do Europe, and itself, a real favour, it would spend those reserves rather than lend them. You can listen to that NPR report here.
CNN also ran an interview with me yesterday, in which I emphasised the same point:
Others say that China’s real opportunity to help isn’t through bailing out Europe, but investing in the EU and boosting domestic consumption of European products.
“What the Europeans lack isn’t money, what they lack is growth,” said Chovanec.
“China can play an important role in saving Europe but not in the way that most people think. Most people think the Europeans are coming to China hat in hand hoping for bailout funds.
“Really the way that China can help Europe is not by continuing to run surpluses and turn around to use the proceeds to lend it back to Europe to keep them on life support.
“The real way Chinese can help Europe is by using some of that money, the $3 trillion worth of reserves they’ve piled up to stimulate consumption … and help create jobs, earnings and opportunity in Europe,” Chovanec said.
You can read the text of the CNN report here. I believe the interview ran as part of a TV segment, but the accompanying video is actually an earlier Q&A with the reporter. If they post the interview segment, I’ll create a link.
Keith Richburg of the Washington Post (whose article you can read here) highlighted the “shopkeeper” analogy I introduced in my last blog post:
Patrick Chovanec, who teaches at Tsinghua University’s school of economics and management, agreed. “It may seem like an all-powerful creditor and weak, supplicant debtors,” he said. “But the debtor countries and the surplus country are locked in a mutual embrace that is problematic for both of them.”
Chovanec compared the situation to that of a small-town shopkeeper who has to continue letting his customers build up credit, for fear that if he doesn’t, they will stop coming and he will be forced out of business.
Of course, the big question this week has been whether Europe would even have a real bailout plan for China to invest in or not, after the Greek prime minister shocked everyone by saying he would submit the whole thing to Greek voters for a referendum. He seems to be backing off that stand, but as I write, he still faces a “no confidence” cabinet vote later today whose outcome is far from certain. Even if the Greeks go along, we don’t really know what exactly the EU will be offering China (and the rest of the G-20). Do they want China to buy EFSF bonds? Invest in new special-purpose funds seeded by the EFSF? Buy country bonds insured by EFSF? We — like the Chinese — will have to wait and see.