China is paying for global imbalances but a concerted effort is key to containing the European debt crises

Whether China and other BRICS members will give a helping hand to European countries that have been severely plagued by their looming debt crisis is now a hot topic around the world.

China's purchase of European debt would not be a show of generosity. To help extricate hard-hit European countries from their current predicament is tantamount to helping China itself. It is also the cost China, as an emerging economic power, has to pay for imbalances in the global financial system.

Most Chinese people hold a negative attitude toward buying Italian national debt. Europe's crisis will put debt buyers in a position of high risk. The return ratio for one-year national debt in Greece increased by 588 basis points to a record 103.84 percent last Monday. Markit iTraxx, an index that traces the sovereign debt of 15 Western European countries, has also reached a two-year high. All this means that the credit default swap cost for sovereign debt has increased to a dangerous level.

In an era of financial, economic and information globalization, the confidence and credibility crises brewing in Europe will rapidly spread to the rest of the world and cause a vicious cycle of self-realization. In the wake of the global financial crisis, the global economic and financial pattern is expected to be on an accelerated path of multi-polarization, a trend that calls for the emergence of several world powers.

China and Europe enjoy a high degree of economic interdependence, with the European Union being China's largest trading partner and largest export market. Under this arrangement, the collapse of sovereign debt in Europe would have a huge impact on China.

For emerging economies, the euro offers a substitute for the US dollar as a settlement currency. For example, Iraq, Iran, Russia, Venezuela and other countries have declared their acceptance of the euro as the currency for their oil transaction settlements. The purchase of Europe's debt by China and other BRICS countries, a kind of support to the euro, is expected to help break the dollar-dominated international monetary pattern. It is also an important step for emerging countries toward pushing for a multi-polarized global monetary system.

Coming to the aid of Europe will, to some extent, help extricate the world from the "dollar trap." The United States has set up a debt-dependent economic system, and overspending is an important feature of this. Heavily dependent on borrowing, the US has managed to maintain a long-term deficit in its trade and current account aided by uninterrupted circulation of the dollar. Such debt reliance means that the US has a huge impulse to over-issue the dollar.

Emerging countries have been bogged down in the "dollar trap" as a result of the appreciation of their currencies and the inflow of hot money since the eruption of the global financial crisis. As the world's leading currency, the dollar's over-issuance has directly resulted in the drastic dwindling of the wealth of those dollar-denominated assets holders and their interests have been seriously compromised. The deterioration of the European debt crisis has accelerated the outflow of their capital.

According to the Institute of International Finance, private capital flowing to emerging markets reached $908 billion last year, 50 percent higher than the previous year. The figure is expected to increase to $960 billion this year and $1,009 billion in 2012. Emerging countries are now under unprecedented pressure from capital inflows and thus badly need international monetary reforms.

The current problem is not whether emerging economies should extend a helping hand to hard-hit European countries, but in what manner. Despite a combined $4.4 trillion in foreign reserves, BRICS members Brazil, Russia, India, China and South Africa do not have the reserve assets to solve the gaping debt crisis in Europe. For example, Italy alone has a debt of 1.9 trillion euros ($2.6 trillion). Under these circumstances, BRICS countries, if they help European economies, should work with international financial bodies, such as the International Monetary Fund.

Providing liquidity is not the key to resolving Europe's debt crisis. A helping hand from China and other BRICS members cannot fundamentally resolve the structural problems that resulted in the outbreak of the debt crisis. The reason behind Europe's predicament is that its debt has outgrown its economic development. Thus, what Europe needs more is investment from emerging countries into their real economic realms, which, together with their advanced technologies and management expertise, will create space for new development and offer time for it to conduct deep and sweeping structural reforms.

The global financial crisis and the worsening debt crises are the result of the absence of a good global governance mechanism. A global crisis requires global efforts to deal with it. In an era of growing interdependence, countries developed and developing should work together to resolve global crises caused by imbalances.

The author is an economics researcher with the State Information Center.

(China Daily 09/20/2011 page8)