Failed euro would be bad for China, but it has good reasons for setting conditions before extending a helping hand to Europe

Will China help to rescue the euro, or not?

For months, European leaders and International Monetary Fund officials have been hoping that China will lend a hand to save the euro.

In August, Premier Wen Jiabao said that China was ready to assist Europe in its hour of need. But he proposed certain conditions should be met before China extends a helping hand, including the European Union's recognition of China as a market economy.

Europe's leaders, however, have not agreed to this, or indeed any other of Wen's conditions.

Hence, in December, at the Lanting Forum in Beijing, Deputy Foreign Minister Fu Ying declared that China could not help the euro.

"The argument that China should rescue Europe does not stand, as reserves are not managed that way," she announced.

European commissioners and lawyers are currently engaged in a heated debate about whether the World Trade Organization should automatically grant China this status in 2016. Whatever the outcome, the benefits are marginal; the primary benefit of market-economy status for China is that it would preclude anti-dumping charges under WTO regulations.

Despite being largely symbolic, market-economy status is important to China. Many Chinese believe that to deny China market-economy status is to dismiss the last 30 years of often wrenching reforms. Above all, China wants a sign of acceptance by the advanced Western economies, which continue to regard the country as a State-run economy.

Western countries still view the Chinese system as authoritarian in many respects, but the picture is not that black and white. After 30 years of transformation, China's economy, society, and, to some extent, its political system, have changed profoundly.

To be sure, China's government keeps a tight rein on the economy, but at the same time, the private sector has taken off, and now accounts for two-thirds of China's GDP and urban employment.

Yet despite this progress, the West seems to be losing patience with China. Before 2004, when China's burgeoning current-account surplus became an international issue, the West believed that China was moving in the right direction, that is to say, becoming "more like us". Now though, that belief is faltering, especially because China has become more assertive since the global financial crisis began in 2008.

But China's assertiveness is not groundless. Given its extraordinary economic record, China has reason to feel proud; and, having long been a student of the West, China has more than enough reason to ask why the teacher is in such difficulties.

In the end, admitting China fully into the international community would help to transform it into a more open society. But the West must keep in mind that China is not interested only in material benefits, such as access to Western markets, or a greater presence in international organizations. The Chinese also want respect.

Europe cannot afford to see the euro fail. But current proposals, such as national redemption funds, or a Europe-wide version with joint liability, would increase the burden on EU taxpayers drastically.

Meanwhile, pressure on the European Central Bank to buy eurozone government bonds is placing the Bank's credibility at risk. External help is the best solution to boost market confidence and save the indebted countries from depression and default.

A failed euro, moreover, would be bad for China, leaving the US dollar as the single international reserve currency. It would also mean that the European market, currently China's largest source of export demand, would be far weaker.

But China will not provide substantial financial assistance without the EU's ironclad guarantee of the investment. Equally important, China will withhold aid unless and until the EU meets certain conditions, including conferral of market-economy status.

China has said what it wants. It is up to Europe to strike the deal.

The author is director of the China Center for Economic Research at Peking University. Project Syndicate

(China Daily 12/13/2011 page8)