5 - Cooperation with China on the Euro crisis

Europeans were less frantic than in 2011, but the euro crisis continued to undermine European coherence towards China. Chinese bond purchases remain opaque.

In 2012, China did not become Europe’s “red knight” by massively purchasing sovereign debt, but it did continue to express confidence in the single currency. The governor of China’s central bank, Zhou Xiaochuan, said that China would not reduce “the proportion of euro exposure in its reserves”. Though it does not publish the breakdown of its foreign-exchange reserves, it is estimated to hold around 25 percent of currency reserves in euro-denominated assets. At the G20 summit in June, China also announced that it would contribute $43 million through the IMF, which could be triggered for European debt needs. Some European officials say in private that China has bought significant amounts of sovereign bonds issued by southern eurozone countries, but, like other private investors, it also experienced the enforced “haircut” on Greek debt, which may have made it even more cautious in its European debt purchases and thus increased rather than reduced spreads in European bond yields.

In 2012, German Chancellor Angela Merkel, who visited China twice during the year, tended to speak to the Chinese on behalf of the eurozone as a whole. (China shares Germany’s view that the key to solving the euro crisis – which Chinese officials call a “sovereign debt problem” – is debt reduction.) Although Europeans were less frantic than in 2011, possible bond purchases remained the most important topic in discussions with China for deficit countries such as Spain. Thus the euro crisis continued to undermine European coherence in relation to China in 2012. In fact, even the meeting between High Representative Catherine Ashton and State Councillor Dai Bingguo focused on the euro crisis rather than foreign policy (Dai expressed “confidence in the future of Europe”). But there are signs that Europe could become more coherent in 2013. As the EU’s current-account balance grows, some member states enjoy ultra-low interest rates, and as the European Stability Mechanism (ESM) becomes operational, China may have less leverage over Europe than it did during the acute phase of the crisis.