The madness of asking China for money

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I am seriously wondering why people think that China bailing out the Eurozone is a good thing. 

China has large foreign exchange reserves because of its trade and exchange rate policy, which allow it to run trade surpluses year after year, together with capital inflow, they force its central bank to create Chinese yuan to purchase foreign assets in order to prevent the Yuan from appreciating too rapidly, thus accumulating large foreign exchange reserve. This is one of the aspects of global imbalances that people have been talking about that caused the GFC. Moreover, the accumulation of foreign exchange reserve by the Chinese has basically been a massive quantitative easing programme from the perspective of Chinese domestic economy, which fuels its own investment-driven boom, which is now facing a reckoning.

But now, amazingly, when it comes to rescuing the Eurozone, people seems to forget that perhaps this was actually part of the problem.

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Let’s be clear about this. Europe, on the whole, is a much richer place than China, and Europe should have the means to solve its own problem, like printing money by the European Central Bank, but they are not using it because of the German’s obsession with hard money. The fact that this is a monetary union of 17 countries makes decision making difficult, which complicates the problem. But on the whole, Europe should not be asking others for capital. In fact, asking for outside capital to rescue the Eurozone should be the last thing Europe wants.

The reason is that Europe, except for Germany and Ireland, have been running a trade deficit which China. The essential thing for peripheral countries is to regain competitiveness and to hopefully run trade surpluses which help their economic growth. Asking China for money into Europe essentially means that Europe is asking China to lend to Europe in order to buy Chinese exports, and this should be absolutely the last thing Europe wants, especially for the peripheral countries. As I have written before, if China ever decides to invest in EFSF in large quantity, it will be doing so to support its won exports.

This is a lose-lose situation, and Europe should not be asking for China’s help. Europe will lose. China will probably lose too in the end.

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Perhaps this kind of news can provide some boost to the stock market, but it is not getting to the core of the problem at all. Unfortunately, European leaders seem to have no idea that they are embracing ideas which will absolutely harm them in the future.