Europe Gives China Second Thoughts: The Ticker

a | A

By William Pesek

So much for China being Europe's sugar daddy.

A few weeks ago, it was plausible to think China, flush with $3.2 trillion of currency reserves, would ride to Europe's rescue. Europe is China's main trading partner and a deep recession there isn't in Beijing's interest. Now, a Chinese bailout is in doubt and Europe has itself to blame.

Yesterday, China reduced reserve requirements for banks for the first time since 2008, a clear signal it's concerned that its economy is vulnerable to Europe's debt crisis. Reserve ratios will decline by 50 basis points effective Dec. 5.

In November, a Chinese manufacturing index slid to 49, a sign of contraction. European leaders have repeatedly failed to devise a credible rescue plan as financial contagion risks intensify. If you're China, do you really want to be loading up on European debt?

That was the hope when French President Nicolas Sarkozy called Chinese counterpart Hu Jintao in October. China, eager to help its main customer and score political points, might want to buy a few hundred billion in French bonds here and a few hundred billion in Italian ones there. The euro zone's unsteady handling of this crisis makes Chinese support less likely.

The problem is partly one of domestic public opinion. Last week, scores of Chinese Internet users were incensed by news that their government had donated 23 school buses to Macedonia. The ill-timed gift came two weeks after 19 preschool students were killed in an overcrowded minibus. The outrage amounted to this: China shouldn't be giving brand-new buses to a tiny European nation when transportation systems at home are so shoddy.

We're talking school buses here -- not mountains of government money going to bail out the profligate lifestyles of rich nations half a world away. China isn't a democracy, of course, but the man-on-the-street view is figuring more and more into decisions in Beijing, where the Communist Party is struggling to maintain legitimacy.

There's still a chance China will pitch in money for a global bailout of Europe or its banks, should that day come. But if wealthy European powers such as Germany won't do more to save the euro, why should developing China?

(William Pesek is a Bloomberg View columnist.)


-0- Dec/01/2011 17:28 GMT