The euro for China: too important to fail and too difficult to rescue

Abstract

The aim of this paper is to analyze China's strategy in relation to the euro. The first section summarizes China's active support to the single currency since its creation up to the first phase of the current Eurozone debt crisis. It shows how China has used a two-pronged approach. It has developed a public campaign in favor of the euro, especially when the market sentiment has been bearish on the single currency, and it has continued to be an active player in the European sovereign debt markets. The second part explains why China has been so supportive. Beijing wants to move away from dollar hegemony and thus it favors a tripolar monetary system based on the US dollar, the euro and the Chinese renminbi (RMB). With this aim, and despite the crisis, China has continued to diversify its foreign reserves into the euro making it by now 'too important to fail', not only because China holds roughly $1 trillion in euro-denominated assets, but also because for China the Eurozone is a crucial market and an important strategic counterweight to US dominance in world affairs. Finally, the third part focuses on how by the end of 2011 China switches to a more cautious approach due to the difficulty involved in rescuing the Eurozone. Domestic pressures, public outcry in Europe against being saved by China, the unwillingness of the European leaders to enter into strategic bargaining and Germany's strategy to use sovereign bond spreads as a market mechanism to create 'more Europe' have convinced policy-makers in Beijing to keep a lower profile while making sure the value of the euro remains stable.

Chinese media in Brussels and EU–China relations

“…A research by Otero-Iglesias demonstrated that China provided 'unequivocal support for the euro' in 2010 and 2011 and increased its holdings of debt from Italy, Spain, Ireland, Portugal and Greece. China's support for the Euro was mainly out of the following considerations: diversification of its foreign reserves; preserving the value of euro-denominated debt; helping maintain a dynamic European market which is important for Chinese imports and exports (Otero-Iglesias, 2014). With its financial support to the Euro, China also sought to get compromise from the EU, who may lift the arms embargo and grant market economy status to China.…”

“…With its financial support to the Euro, China also sought to get compromise from the EU, who may lift the arms embargo and grant market economy status to China. But the EU 'underappreciated China's help' (Otero-Iglesias, 2014). At the EU-China summit in 2012, former Chinese Premier Wen Jiabao openly expressed his disappointment: 'I have to be very frank in saying this.…”