Oct 17, 2008

World - Will China bail out the West ?

Michael Bristow

With nearly $2 trillion (£1.2 trillion) worth of foreign currency reserves, China is being touted by some as the potential saviour of the Western banking system.

In order to bail out ailing financial firms, Western governments need money - and China seems a good place to get that much-needed cash.

But Chinese economists say that while Beijing is ready to play its part in the rescue efforts, it will not be writing any blank cheques.

Senior Chinese officials say they are more focused on their own, internal problems, such as avoiding a domestic economic slowdown.

And any help offered by the Chinese government to solve the current financial crisis is likely to come with strings attached.

Gigantic loan?

China's burgeoning exports over recent years have helped the country build up the world's largest foreign exchange reserves.

The power equation is changing and the Chinese are pleased with this... In their eyes, this also proves that the Chinese model is working
Willy Lam
Chinese University of Hong Kong

Figures released this week show these reserves now total $1.9 trillion.

Writing in the Financial Times, US-based economist Arvind Subramanian suggests the US could borrow some of this money.

"The Chinese government could offer to lend up to $500bn to the US government for the rescue of its financial sector," wrote Mr Subramanian, of the Peterson Institute for International Economics.

In fact the Chinese have already been doing something similar for a number of years. Beijing has been buying up US government debt, which has allowed the US to spend beyond its means.

"China is already helping the US economy and, if possible, it will continue to do this," said Zhao Xijun, of Beijing's Remin University of China.

Shared burden

But Mr Zhao, deputy dean of his university's school of finance, made it clear that China alone could not solve all the world's financial problems.

Other emerging economies, such as Russia, India and Brazil, will also have to help, he said.

"It's not sufficient for emerging economies or developed countries to do this on their own. They must get together," added Mr Zhao.

And even though China might have the money to help out, it is not certain that there is the political will to put the world's financial crisis at the top of the agenda.

Chinese leaders have already indicated that they believe Western governments should clean up their own financial problems.

Domestic priority

Yi Gang, vice-governor of the People's Bank of China, made this point at a meeting of world financial leaders in Washington last week.

"The World Bank should urge the developed countries to shoulder their due responsibilities in stabilising the global economy," he said.

Chinese Premier Wen Jiabao has added his comments to the debate. He said his country would do its bit to help stabilise world financial markets.

But in a telephone conversation with Britain's Prime Minister Gordon Brown, he also made it clear where China's priority lay.

"The most important thing for China now is to handle its own affairs well," China's state-run Xinhua news agency reported him as saying.

And for all its foreign exchange reserves, China is still a developing country with its own problems that will require lots of money to fix.

Just a few days ago, the Chinese leadership promised to double incomes in rural areas - where most of its people live - over the next 12 years.

The government will have to try to meet these promises despite what independent Chinese economist Andy Xie believes will be an economic slowdown in China.

He said the country had largely escaped financial problems affecting others, but would have to look to other areas of the world to generate future growth.

"China needs to play a bigger role in circulating money among emerging economies," he said.

Political strings

Even if China does agree to help with the global financial crisis, there will almost certainly be conditions attached to any help the Chinese government offers the West.

"The Chinese are definitely looking for some give and take," said Willy Lam, of the Chinese University of Hong Kong.

Specifically, Beijing will want guarantees that it will be able to buy US assets without the opposition that this has generated in the past, he said.

Its new-found leverage over the US could also lead to the Chinese making political demands on its counterparts in Washington DC, added Mr Lam.

China has just registered its opposition to the US sale of $6.5bn-worth of arms to Taiwan, a self-governing island that China considers its own.

"The power equation is changing and the Chinese are pleased with this, although they do not want to gloat too much," said Mr Lam.

"In their eyes, this also proves that the Chinese model is working."

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