There’s been a lot of talk this week in China about whether it should swoop in to save the eurozone. Loading up on Italian debt is one possibility, which could keep Europe’s overall bailout tab in check and boost market confidence. Another idea is to create an EU-China bond. Unlike an EU-only bond (a concept that hasn’t gained traction among fuming Germans and Greeks), an EU-China bond would rope richer China into the deal by offering a better interest rate than it’s getting on, say, U.S. Treasury bonds. And, backed by the heft of the German economy, the bond would offer a low-risk bargain for investment-savvy Beijing.
This sounds like a great solution, but here’s why it won’t work. China certainly has the cash on hand ($3 trillion in foreign exchange reserves) to make a difference. It also seemingly has a strong interest in keeping global markets afloat. But that wasn’t the take I got at a lunch this week in Hong Kong with a regional banker, an economist, and a Hong Kong politician.
For one thing, frugal Chinese citizens aren’t keen on spending their country’s savings to bail out profligate Europeans, they said. Beijing is already under enough pressure to spend more of its export cash on its own people. The government and China’s sovereign wealth funds also aren’t sold on the idea. That’s partly because China doesn’t feel as vulnerable to Europe’s debt crisis as we might think. Recoiling European consumers haven’t put a big dent in China’s export sales. And as for the bargains on offer in eurozone debt, Laura Cha, deputy chairman at HSBC, told me those bargains will only get better once the European banking system really hits bottom.
There are also reasons why Germany wouldn’t be keen on such a deal. This chart from the Council on Foreign Relations suggests that, if China’s purchases in eurobonds came at the expense of its investments of German debt, Germany’s borrowing costs would rise, hurting the German economy.
That leaves neither of the real dealmakers in this scenario gaining from the transaction. Of course, one perk for the Chinese would be boosting its status as a global financial player. But when you have a billion citizens restlessly awaiting their chance to climb out of poverty, it’s worth thinking twice about draining your rainy day fund.