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China Can Bolster EU Finances but Wants Reciprocity

If China decides to help stabilize the EU's finances it will expect something in return.
By Amiel Ungar
First Publish: 10/31/2011, 6:02 AM

Klaus Regling of the European Financial Stability Facility (better known as the bailout fund) is visiting China in the hope that China will lend a hand,  or to be precise, a hundred billion euros, in purchasing European debt to help stabilize the European financial system.

The Chinese have a definite interest in a stable Europe, a major purchaser of Chinese exports and with currency reserves in the trillions, a hundred billion euros is not going to break the Chinese bank.

Such an intervention would offer final confirmation of China's restoration to the rank of a great power, thus fully reversing the humiliation endured by China in the 19th century. French President Nicolas Sarkozy, who faces an uphill, if not hopeless, battle for reelection in 2012, feels that Chinese involvement would help Europe, and that if the Chinese invest in European debt in the same fashion that they have invested in American debt, no one will suffer.

His Socialist opponent in next year's contest, Francois Hollande, has called the plan "deeply troubling" and an "admission of weakness". “Are we supposed to imagine that if China comes to the aid of the euro zone, it will do so without expecting anything in return?" asked the Socialist presidential nominee.

So what can the Chinese ask in return?

For one, they can ask the European Union to lift its embargo on the sale of arms to China. China has made great strides in building a domestic arms industry. It is, however, recently encountering difficulty in procuring state-of-the-art Russian arms because the Russians are suspicious of Chinese reverse engineering and finding themselves undercut by cheaper Chinese copies.

There are areas where the Chinese can learn from the Europeans. Obviously European arms manufacturers would be only too happy to sell to the Chinese and the lifting of the embargo would represent a moral triumph to China. It would also send a message to Chinese dissidents or restive nationalities such as the Tibetans that they cannot count on outside assistance.

As France has sold aircraft carriers to a Russia that is arguably not much freer than China (although it proceeds with the formality of a multiparty system and elections) the EU may be forthcoming towards China.

China would like to and could probably get the Europeans to desist from moral hectoring over human rights as well as unfair Chinese trade practices, such as currency manipulations and export dumping.

China is not about to open its coffers to the European Union instantly. China, like any country about to part with a hundred billion euros, must perform due diligence and understand what is getting itself into. This will also force the European Union to explain the details of its financial package something which the EU has not been open about even to its own citizens. China has been burned in the past by international investments that have gone sour.

The Chinese also complained that they have important domestic needs so that extricating the rich Europeans while neglecting the growing inequality in China will not sit well with Chinese public opinion. Even an authoritarian Chinese government and party must pay heed to this opinion.

China is not the only address to which the European Union is turning. The Spanish Finance Minister was in Moscow to urge the Russians to invest more in Spanish debt and the Gulf States are also being courted.