China-EU: Taking the headlines again.

How Chinese government perceive EU debt crisis? How the media protray their stance is quite interesting. Personally I think Mr. Wen and other Chinese officials are literally saying the same things. However, how media phrase them are quite interesting.

News coverage last year(2011):
Wen's Speech, Sep. 14th in Dalian (Telegraph, UK) and
Opinion from Chinese officials, Dec. 4 (NY times, US)



In short, they are pretty much saying, Yes, we can extent the helping hands: under a few conditions:
a.) You guys have to structure your own institutional problem first.
("Countries must first put their own houses in order" )

b.) DO NOT forget that we still have a few trade issues to solve.
( "we need bold steps to give redirection to China's strategic objective. We believe they should recognise China’s full market economy status")

c.) NO sovereign fund investment
(“The argument that China should rescue Europe does not stand, as reserves are not managed that way” )

News coverage this year(2012)
No Sovereign Fund/Reserve involvement (NYtimes, Feb 13)
Preparing for further involvement (WSJ, Feb 14)

Why there are such difference?
Review the previous conditions, a.) is clearly (or say, almost) solved. b.) could be used as a negotiation leverage...the stances on c.) never changes, China won't use their sovereign funds for investments.

How EU might tap their hands into Chinese foreign reserves is now getting in picture. Yet, at what price EU is ready to pay? That part I am still curious. China can open their vault, but you have to possess the right key!

On the other hands, I would like to argue, why China might not use their reserves on EU debt crisis?



Wen's Comment: start “fine- tuning” economic policies this quarter

What does this "fine-tuning" imply? Tighten the loan to construction, yet at the same time ease the credit line for major corporations?

When managing economy with policy tools, there is always a likelihood of mis-allocations. When China stirred public fundings to fend off economic crisis, lots of "over-heated" sectors were created. In other words, some risks are piled up high. On the other hands, some other sectors are still lukewarm, consumption to GDP ratio still did not rise up as expected. *( as noted here, China's consumption/GDP ratio was low and falling, some growth is picking up yet whether that is in a fast enough path is still a question market.)

The amassed foreign reserves can certain help China when a possible, if not probable, crisis to come internally. I still recalled in 2004 how the Norwegian professors praised the courage of Chinese government to counter speculator attacks in Hong Kong. Yet, how to use it to help Chinese economy now is in questions.

So, there are several likely scenarios:

*1.) The "12th five year plan" focus on domestic demand, which did not foster quite well as expected. (and also creating some bubbles in real estate and public infrastructures). And the export market is dying at the same time. ==> very bad for Chinese economy!!
Solution: We can lend out money to Europe, in a sense to stabilize one of the export destination and increase international exposure and economic prominance.

2.) The domestic economic policy should be restructures: all resources should be faciliate to that! No divergence.
==> No bailout, New policy adjustment, and increase the investment into certain new industries.
==> Danger: some other bubbles may emerge somewhere less expected.

I think 1.) is more likely what they have in mind now.

We will see how China use the reserve for better (or worse) cause, and still more to be expected when deals are really inked.

Note: I was reading another topic covering the comparison between "State Capitalism" and "Liberal Capitalism"...BRICs and other emerging markets have a clear trace on their "State Capitalism" development model.