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China Worries More for EU’s Growth Than for Its Own People

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China offered to take concerted action to help the financial stability of Europe, whose countries have been haunted by a sovereign debt crisis since the beginning of 2010. European officials said that Chinese vice premiere Wang Qishan, speaking to the annual China-EU High Level Economic and Trade Dialogue on Tuesday, December 21, gave assurances that China was ready to support European efforts for stabilisation, as per an FT report.

Chinese spokesperson Jiang Yu was quoted yesterday by BBC News as reiterating the vice premiere’s pledge to support the EU in overcoming its debt crisis. A major part of China’s support would stem from bond purchases, though it did not give specific details of its support. China has been buying bonds of the 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 the Eurozone’s stability fund. Spain’s debt costs are also on the rise, prompting speculation about Spain’s ability to raise further bond funds.

China’s Prime Minister Wen Jiabao visited Greece in October. He Wenpromised to Greece that China would buy Greek bonds and increase itsinvestments in the country. Similarly, China’s President Hu Jintao toured Portugal in November. During his trip, he said China would take concrete measures to support Portugal, including bond purchases.

The reason for China’s enthusiasm for supporting the EU’s financial stability is obvious. The EU is China’s largest trading partner. Two-way trade between China and the EU in first 11 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 the last three months even though China bought some of the public debt of Greece and Portugal. It is doubtful that China’s support for the Eurozone in itself will lead to fiscal stability for the Eurozone and the EU as a whole.

The EU and the U.S. are observing an arms embargo of China because it  is considered a state-controlled economy. The Chinese Prime Minister urged the EU last month to consider China as a market economy and lift the arms embargo. The EU so far has declined to comply with China’s request, saying the decision had to be taken by all members of the EU. These two factors, the arms embargo on China and China’s business interests in Europe, might have pushed China to offer open support to the debt-ridden EU countries.

China’s interest in the EU’s financial stability does not stem from the interests of Chinese people but from the interests of the wealthy class who occupy top positions in the Chinese Communist Party as well as the government. The market reform path followed by China since Deng Xiaoping took the reins of the Chinese party and government has given rise to a new wealthy class Chinese who have amassed most of the wealth generated from the cheap labour of millions of working class Chinese.

China spent more than $500 billion as stimulus in the wake of the 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’s economy is overheated, with rising inflation and real estate prices. China has taken several steps to rein in an excessive money supply in the market, including raising the central bank’s interest rate and the reserve requirement ratio for banks. However, these measures seem to be insufficient.

Hu and AngelaA major part of the stimulus was spent on road construction and housing, as well as on consumer loans for buying high-cost goods such as cars and refrigerators. Reports have emerged that many houses built through the stimulus are still vacant because of high prices. A majority of the people of China live in villages where employment is scarce. Those who migrate to the southern wealthy states are hired at cheaper wages; therefore the wealthy have amassed even more wealth at the cost of workers’ living standards. The wealth gap has increased multifold because of pro-rich liberalisation and privatisation policies over three decades of capitalist reforms.

China has amassed more than a $3 trillion trade surplus, a large chunk of which it has invested in the U.S. 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 the near future if analyses from global institutions give any clue. The IMF has warned several times that China should concentrate on improving its domestic market rather than depending upon exports. Although this suggestion is aimed at the appreciation of the Yuan’s value, it is also apropos in the wake of the continuing realisation crisis and slow growth in the US and the EU, which are China’s biggest export markets.

The U.S. and the EU are reeling under high unemployment and slow growth rates. Even moderate growth in some countries has not led to employment generation so far. This situation effectively shrinks China’s export market, forcing it to look toward the domestic market. Unless China concentrates on improving the living standards and purchasing capacity of its workers, it too will be pushed into a profit realisation crisis, threatening its high growth rates.

Moreover, European countries are implementing deeper austerity measures such as drastic spending cuts and tax increases. Such moves shift money from the pockets of salaried workers towards profits for their employers. As financial institutions as well as commodities-producing companies and manufacturers invest their profits in financial markets rather than realising their profits as capital to produce commodities, private spending receives deep, severe blows. This suggests that European consumer markets are shrinking day by day because of these austerity measures.

Hence, China should aim to improve its own market rather than trying to preserve the export market of the EU through bond purchases. Because of the austerity measures, overseas bond purchases will only increase profits for the European wealthy, not extend exports. Previously, China has given hints of improving its domestic market, but such moves do not seem to be high on its scale of priorities. Unless the workers’ share of the wealth is increased to a proper level, China will be facing a dearth of export markets, slowed growths, rising inflation, a property bubble, and finally social unrest.

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