China Worries More for EU’s Growth than for Its Own People
China offered to take concerted action to help financial stability of Europe, the countries of which are haunted by sovereign debt crisis since the beginning of 2010. European officials informed that Chinese vice premiere Wang Qishan gave assurances that China was ready to support European efforts for stabilisation, while speaking to the annual China-EU High Level Economic and Trade Dialogue on Tuesday, December 21, as per FT report.
Chinese spokesperson Jiang Yu is today quoted by BBC News as reiterating Chinese vice premiere’s pledge to support the EU to overcome debt crisis. China’s support majorly stems from bond purchases though it did not give specific details of its support. China has been buying bonds of most indebted countries of the Eurozone such as Greece, Ireland and Portugal. Many analysts are forecasting that Portugal may be the next Eurozone country to tap Eurozone stability fund. Spain’s debt costs are also on rise, prompting speculations over Spain’s ability to raise further bond funds.
China’s Prime Minister Wen Jiabao visited Greece in October. He promised to Greece that China would buy Greece bonds and increase their investments in Greece. Similarly, China’s President Hu Jintao toured Portugal in November. During his trip, he said China would take concrete measures to support Portugal that included bond purchases.
The reason for China’s enthusiasm to support EU’s financial stability is obvious. The EU is China’s largest trading partner. Two-way trade between China and the EU in first eleven months of this year stood at $434 billion and that is why Beijing is interested in regional stability. However, bond costs continued to rise during last three months even though China bought public debts of Greece and Portugal. Therefore, it is doubtful that China’s support to Eurozone would be transformed into the fiscal stability of Eurozone and the EU as a whole.
The EU and the US are observing arms embargo on China assuming it a state controlled economy. Chinese Prime Minister urged the EU last month to consider China as a market economy to lift the arms embargo. The EU so far declined to comply with China’s request saying the decision had to be taken by all members of the EU. These two reasons, arms embargo on China and China’s business interests in the Europe, might have pushed China to offer open support to debt ridden EU countries.
China’s interests in EU’s financial stability do not born from the interests of Chinese people but from the interests of the wealthy class people, who occupied top positions in the Chinese Communist Party as well as the government. The market reform path followed by China since Deng Xiao Ping took reins of the Chinese party and the government gave rise to a new wealthy class of China that amassed most of the wealth generated from cheap labour of millions of working class of people.
China spent more than $500 billion as stimulus in the wake of global financial meltdown to prevent the crisis gripping China. Cleaning up the excesses of that massive stimulus package posed the largest macroeconomic risks the World Bank said earlier this year. Because of the stimulus, China economy is overheated raising inflation and prices in property market. China took several steps to halt excessive money supply in the market including raising interest rate of the central bank and reserve requirement ratio for banks. However, they seem to be insufficient.
Major part of the stimulus was spent in road construction and housing apart from giving consumer loans for buying high cost consumer goods such as cars and refrigerators. Reports have emerged that many houses built through stimulus are still vacant due to high prices. Majority of the people of China live in villages where employment is scarce. Those who migrated to the southern wealthy states are hired at cheaper wages due to which wealthy amassed even more wealth at the cost of workers’ living standards. Wealth gap increased multi fold because of pro-rich liberalisation and privatisation policies over three decades of capitalist reforms.
China amassed more than three trillions of trade surplus, a large chunk of which was invested in the US and EU debts. China’s foreign currency reserves are said to be at $2.4 billion. However, the days of trade surpluses will be over in near future if analyses of the global institutions give any clue. IMF warned several times China should concentrate on improving domestic market rather than depending upon exports. Though, its suggestion is aimed at appreciation of Yuan value it is also true in the wake of continuing realisation crisis and slow growths in the US and the EU, which are biggest export markets for China.
The US and the EU are reeling under high unemployment and slow growth rates. Even moderate growths in some countries are not transformed into employment generation so far. Such situation effectively shrinks export market for China forcing it to look toward domestic market. Unless China concentrates on improving living standards and purchasing capacities of its workers, China will also be pushed into profit realisation crisis threatening its high growth rates.
Moreover, European countries are implementing deeper austerity measures such as drastic spending cuts and tax raises. Such moves shift money from salary pockets of the workers to profit pockets of the employing companies. As financial institutions as well as commodities producing companies and manufacturers are investing their profits in financial markets rather than realising their profits as capital to produce commodities, private spending is getting severe and deeper blows. This implies that the European consumer markets are shrinking day by day because of austerity measures.
Hence, China should aim to improve its own market rather than trying to preserve export market of the EU through bond purchases. Overseas bond purchases will only increase profits of European wealthy rather than extending exports because of austerity measures in the EU. Previously, China gave hints of improving domestic market but such moves do not seem to be on required scale. Unless workers share of the wealth is increased to a proper level, China will be facing dearth of export markets, slowed down growths, rising inflation, property bubble and finally social unrest.