Amid Europe debt crisis, EU goes hat in hand to China

Although China, the world's largest creditor, has bought European bonds in the past, experts doubts that it will invest in a new investment vehicle meant to alleviate the Europe debt crisis.

China is unlikely to play the role of white knight, riding to the rescue of debt-ridden European nations, Chinese and foreign analysts here are warning, as a visiting European official seeks Beijing’s financial help.

“China will be polite, but they are not likely to put up any serious money,” predicts Andy Xie, former chief Asia-Pacific economist for Morgan Stanley.

Klaus Regling, head of the Europe’s bailout fund, the European Financial Stability Facility, met Chinese officials here on Friday to explore how ready they are to contribute to a new fund designed to relieve troubled European nations’ debt burdens.

Mr. Regling cautioned against high expectations. His visit, he said “does not mean that I expect any precise outcome of our talks. There are no negotiations… and there will be no conclusion during my visit.”

China's vice finance minister was equally cautious, saying his country would wait for more details before committing to the fund.

"We need to wait for the technicalities to be clear and also to carry out serious studies before we can decide on investment," Zhu Guangyao told reporters.

China is the world’s biggest creditor, with foreign exchange reserves of around $3.2 trillion. Europe would like Beijing to use some of that money to buy European bonds. This week’s European summit proposed a new “special purpose investment vehicle” to buy distressed countries’ bonds, though the details of how it might work have yet to be decided.

“Politically it would be very difficult for China” to buy in heavily to such an investment vehicle, says Michael Pettis, who teaches finance at Peking University. “After all, this is a country that is many times poorer than the countries it is being asked to help.”

At the same time, he points out, China’s sovereign wealth fund has come in for heavy criticism at home for earlier investments abroad that have performed badly. “China is not keen to repeat that experience,” Mr. Pettis adds.

Nor is the government here likely to offer large sums of money to bail out countries over whose future economic policy it has no influence, suggests Mr. Xie. “If you bail someone out, you need to be sure that it is sustainable,” he argues. “China has no influence over Europe and no control over how its money would be used.”

China has bought EFSF bonds in the past, Regling pointed out, and has proved “a good and loyal customer.” Those bonds are AAA rated, he reminded reporters, and “China must invest every month because its foreign exchange reserves go up every month. They are interested in solid, attractive, safe investment opportunities and I am happy that our bonds have been in this category in the past.”

Chinese premier Wen Jiabao said last month China was willing to offer “a helping hand” to Europe, but said pointedly that a reciprocal friendly gesture, such as offering China market economy status, and thus easing Chinese exports, would be appreciated.

“The Chinese government is waiting for a response,” says Ye Tan, a well known independent economic commentator. “If Europe wants large-scale Chinese help, giving market economy status will be one of the requirements.”

That is not something Regling is talking about. “I am not here to discuss any concessions,” he told reporters. “The Chinese authorities are regular buyers of EFSF bonds, they are good commercial products not linked to any other ideas.”

This time, though, Beijing is likely to be cautious about getting involved in the special investment fund, says Ms. Ye, because “China has to decide whether this fund can solve the crisis or not. If it looks as though it will need a lot more money again sometime in the future, that is risky.”