Will China Help to Alleviate the Euro zone Debt Crisis?

When German Chancellor Angela Merkel visited China in early February, Chinese Prime Minister Wen Jiabao soothed some European Union (EU) leaders by floating the idea that China would help ease the euro zone debt crisis. However, China's extended hand remains short of reach.

Sino-European economic ties are grounded in export-import relations. The EU is now China's largest trading partner, with imported goods peaking at a value of €281.9 billion ($379 billion) in 2010, according to the European Commission. Similarly, China is now the EU's second largest trading partner, behind the United States.

European leaders hope that the close and intertwined economic relations between China and the EU will give leaders in Beijing the incentive to help the continent. Indeed, China's own economic growth has slowed down partially due to a decrease in export flow to the debt-stricken European countries.

China is closely connected with the European Union, less so from a banking standpoint and more so from their reliance on exports as a major part of their economy. Slower growth in Europe will mean slower growth in China and you are already starting to see that in the latest economic numbers, said Michael Yoshikami, founder and chairman of Destination Wealth Management in Walnut Creek, Calif.

The International Monetary Fund (IMF) predicted earlier in February that China's economy would definitely take a hit should the euro zone debt crisis lead to a sharp, economic recession. However, the IMF also reported that China has ample room to concoct a stimulus package that could weather the storm.

Scholars and politicians argue that the crisis in Europe is global in nature. The downfall of the euro zone economies could potentially plunge the world into another global financial crisis. Emerging countries, including China, are being called upon to buy up the debt of these countries in order to prevent this worst-case scenario. With a foreign currency reserve of close to $3.2 trillion, China has become the primary target of these pleas.

European leaders hope that China's willingness to help out might lead to a large contribution -- perhaps a bailout package through the IMF or the purchase of a huge sum of bonds. However, China's promises have yet to develop into concrete financial action.

Ideally, European nations would like to see China create an IMF-like fund for some sort of pool of assets that might be tapped when the need arises, said Yoshikami.

Merkel herself while visiting Beijing requested that China directly purchase some of the European debt. However, she was briskly shut down by Chinese officials saying that such investments were 'difficult' for long-term investors, the New York Times reported. China would only truly consider directly investing funds in industrial and other real assets.

China has indeed confirmed its refusal to assume the position of savior.

China's standpoint is very clear. Europe should make great efforts to solve its own problem, Zhu Guangyao, China's Vice Finance Minister told Xinhua News in Mexico City while attending the G-20 Finance Ministers summit.

China Bail-Out: Why Not?

Although bailing out the European countries would increase China's international status as a major economic power, China hesitates to take the risk.

China prefers to do things multi-laterally, rather than bilaterally, said James C. Hsiung, professor of politics at New York University.

In effect, the only way China has truly offered to help alleviate the Eurozone crisis is through IMF channels.

If China offers aid to the EU through the IMF, it means that the IMF will take on the subsequent onerous responsibility of overseeing and monitoring how the funds will be used by the aid recipients. In other words, let the IMF be what in the military is called the 'master kick sergeant.' It would make China look, and remain, the kind and benign donor, Professor Hsiung explained.

The most realistic fashion in which China could ease the debt crisis is through the IMF's rescue fund: the European Financial Stability Facility (EFSF).

The EFSF was created in 2010 to safeguard financial stability in the Euro zone. Its purpose is to raise capital and act as a source of funding for loans to countries with heavy debts.

China could potentially pour in huge sums of money into the EFSF, Professor Hsiung believes.

But before China contributes to the EFSF, Chinese leaders have made it clear that the European countries need to take more proactive actions in redressing their faultu economic behavior -- i.e., strengthen fiscal consolidation, cut deficits and reduce debt risks in light of their national conditions, as Vice Premier Wen said, according to Bloomberg.

We hope the EU will soon reach internal consensus, make the political decision and send to the international community a clearer and a stronger message of policy responses, Wen continued.

Quid Pro Quo

Part of China's reluctance to help rid the European countries of their debt crisis is the uncertainty of any return on China's investments.

If China becomes the prime contributor to the EFSF, then can it expect a larger role in the IMF?

One way that China hopes to increase its membership weight is through the IMF currency -- the Special Drawing Rights (SDRs). China hopes to back SDRs with the renminbi (RMB), establishing the Chinese currency as an international standard.

Voting in the IMF is weighted, and the value of SDRs is based on a basket of currencies. So, if China's weight increases and the RMB is given more prominence, then China will have a bigger SDR quota plus a bigger say in voting, explained Professor Hsiung.

If the European countries request that China become their financier, Chinese leaders don't see why they wouldn't consider China's economy equal to that of Europe.

Vice Premier Wen first linked China's financial help to Europe in September of last year with demands that the EU grant China a market economy status (MES).

The World Trade Organization's standard for a market economy relies on the government's non-interference with the economy. In other words, the forces of supply-and-demand drive the economy, versus government's manipulation.

MES would grant China several advantages. Import duties would not be imposed as severely on Chinese manufactured goods in Europe. Secondly, MES would affect anti-dumping procedures. Currently, anti-dumping investigators compare prices of Chinese goods sold in European markets to the prices of goods sold by other low-cost countries. However, in granting China MES, anti-dumping investigators would need to compare the prices of Chinese exports to the same goods price in China.

A 'market economy' designation will change China's status in international institutions and under the laws of certain countries like the U.S., where non-market economies are in effect being discriminated against, said Professor Hsiung.

China will automatically acquire MES by 2016, but Chinese leaders urge the EU to recognize the status beforehand. However, European countries have repeatedly rejected China's request. In effect, China sees the rejection as an act of protectionism, further distancing Beijing from taking an active role in the EU's bail-out dream.

The United States also does not recognize China as a market economy.

China's empty promises are a result of traditionally, risk-averse leaders and the struggle to position China on the world stage as a leading power. Furthermore, China has historically deferred to non-interference in international affairs, often more preoccupied in resolving internal problems.

As of now, experts have reasoned that China could weather another global recession with the implementation of a strict stimulus package. But if China were to inject large funds into the European debt crisis, this potential could be cancelled out.